Europe@Risk, says World Economic Forum report
Posted by meb at October 30th, 2008
The World Economic Forum’s Global Risk Network has released a new edition of its Europe@Risk report, which is published ahead of the World Economic Forum on Europe and Central Asia. The report examines the global risks most pertinent to Europe, Russia, Eastern Europe, Turkey and Central Asia.
Irene Casanova, co-author of the Europe@Risk report and associate director of the World Economic Forum’s Global Risk Network, said, “Confidence among lenders has dramatically decreased and, combined with liquidity drying up in the markets and high levels of uncertainty, the risks of entering a prolonged recession are growing.”
Casanova said in the summary, “Although we cannot say the economic slowdown, energy considerations and demographic shifts will affect the countries of the region in exactly the same way, we do find that effective mitigation of related risks in these areas requires further collaboration between governments, businesses and other stakeholders.”
The report claimed that the financial meltdown will affect the non-financial economy in the region. In Western Europe, growth prospects are being revised downwards, industrial production is decreasing in several countries and unemployment is likely to increase. In Central Asia, countries which have high levels of financing through international capital markets will be more vulnerable to the global financial turmoil. It said Turkey as well will not be able to isolate itself from the impact, though it may have experiences different from those of other countries.
The report said the economic situation puts a number of the region’s challenges in new a light. Slow or no growth combined with tighter credit conditions will impact consumer, corporate and government spending. The report was prepared against the backdrop of the global financial turmoil that began in 2007 and reached a critical point this year. Banks on both sides of the Atlantic have been bailed out by governments, and rescue plans for the financial sector have been put in place all over Europe.
Turkey has been able to remain on the list of countries that have sustained positive economic growth, while many Western European economies have posted negative growth rates and are officially in recession. The report stated that the International Monetary Fund (IMF) Global Outlook released last week shows a serious global downturn, with projections for growth in European economies being particularly affected: Germany, no growth; UK, -0.1 percent; France, 0.2 percent and Spain, -0.2 percent. On the other hand, GDP growth projections for Russia, Turkey, Central and Eastern Europe, and the Commonwealth of Independent States (CIS) are still positive, at 5.5 percent, 3.5 percent, 3.4 percent and 5.7 percent, respectively.
The Europe@Risk report warned, however, that emerging European markets, including Turkey, face risks due to their current account deficits and high levels of external debt. High dependence on foreign capital amplifies their external vulnerability, the report said. It acknowledged, however, that structural reforms have boosted growth and enhanced productivity across the region. The growth rates of these markets have been high in recent years.
The report highlighted Turkey as a success story because of its economic growth: “Turkey, after a succession of boom and bust cycles, implemented fiscal, monetary and institutional reforms enabling the country to reach average growth of almost 7 percent during the period 2002-2007. The private sector has grown successfully attracting greater levels of foreign direct investment (FDI): from $1.1 billion in 1995 to $21.7 billion in 2007. The stock value of FDI currently stands at about $85 billion.”
“How can the region manage the energy security challenges as demand grows?” was a question the report tried to answer. It cautioned that potential energy supply disruptions in the region could trigger tensions and even conflict because the energy supply chain is vulnerable. “Combined with demand-side pressures, incidents in one area might have knock-on effects on the wider region,” it noted. It stressed that access to Eurasian energy to reduce Europe’s dependence on Middle Eastern oil and Russian gas is at the center of the European Union’s strategy.
The WEF report says the Nabucco project, which will run from the Caspian region to Austria through Turkey, Bulgaria, Romania and Hungary, runs the risk of failure due to financing problems. It predicted that without access to Turkmen gas, the viability of the Nabucco project is doubtful. The report also mentioned that Turkey is pursuing the idea of making Iran a European gas supplier and has offered to mediate between the US and Iran.
According to the WEF, global energy consumption is projected to increase by 50 percent between 2005 to 2030. In countries outside of the Organization for Economic Cooperation and Development (OECD) total energy demand is expected to increase 85 percent by 2030, compared with an increase of 19 percent in OECD countries, adding more pressure to existing energy sources. The study predicts that fossil fuels will continue fulfilling much of the worldwide energy demand in the short run and cautioned that fossil fuel supply management is crucial for the geopolitical stability of Europe. In the global context, the EU currently accounts for 16 percent of global energy demand.
With 12.4 percent of global oil production, Russia was the world’s largest oil producer in 2007 and the second largest oil exporter. For gas it is both the world’s biggest producer and exporter, with 21.5 percent of global production. The report calls on the EU to encourage investment in alternative energy sources. Investment in renewable sources of energy – such as wind and solar energy — is increasing but remains low compared to investment in oil exploration and coal and nuclear energies. Biofuels, including ethanol and biodiesel, might become a more important part of the liquid supply mix despite the debate over the subsidies received by this sector and the tradeoff between land use for biofuels instead of food crops.
The report also touched on the demographic shift in the region. The population of the EU and the wider European region grew in 2007 by 3.5 percent to 822 million, of which the EU represents 497 million. However, over 80 percent of the population growth in the EU came from migration. As the birth rate falls and the baby boomer generation enters old age, there will be an overall decline in the population of the EU unless migration is allowed to compensate for the loss in natural population growth. Russia is already experiencing an acute decline in its population, with a decrease of approximately 200,000 people a year.
The report warns that the European population is aging and that declining fertility rates coupled with longer life expectancies will make the population pyramid more top heavy. Western and Eastern Europe will experience overall population decline and an increase in the average age of the population. Trends for Eastern Europe project that over 45 percent of the population will be over 60 by 2030. For the wider EU region, the number of young persons (aged 0-14) will drop by 18 percent by 2050. The working-age population (15-64) will fall by 48 million, or 16 percent, whereas the elderly population (aged 65+) will rise sharply, by 58 million, or 77 percent. The fastest growing segment of the population will be the very old (aged 80+).
Turkey is the only country in the region that is an exception to the overall trend, experiencing strong population growth. It has the youngest population in the region, with over one-third of its population under 25. This youth bulge is expected to peak around 2030 before beginning to decline.
The WEF report also analyzed how education factors into the development of the region and explored how the region’s governments and companies find solutions and incentives to reform education systems and ensure that workforce skills correspond to the needs of employers. It predicted that a lack of skilled and highly trained people, in particular in the areas of science and technology, will reduce the competitiveness of economies.
Turkey faces a challenge though, the report suggests, because vocational training is lagging as university education becomes valued more highly, resulting in a drop in the number of people entering vocational programs though the need for these vocational skills is rising. It acknowledged, however, that Turkey is focusing particularly on this problem through campaigns targeted at young people and through consultation with businesses to achieve better balance in the skills base. With high unemployment levels among graduates, the Turkish government is trying to encourage more people to enter vocational training in disciplines that are in high demand, the report noted.
The Europe@Risk report was prepared by the Global Risk Network of the World Economic Forum and is based on the insight of experts and regional business leaders collected through workshops and interviews, as well as on publicly available data.
source: Today’s Zaman
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