The European Union

The European Union was hit harder by the crisis than the other regions in 2009. Domestic demand, exports and employment fell steeply in all the member countries except Poland.3 At the same time, the public finance indicators deteriorated markedly, owing to government interventions to prop up the financial system and support the economy.The contraction in output, lasting from the spring of 2008 to the following spring, was followed by a moderate but stable export-led recovery, with domestic demand remaining weak. In 2010 tension flared up again on the financial markets, triggered by the problems of Greek public debt management, and the strains then spread on a wave of fear about the sustainability of the public finances of other countries of the area. In this situation of renewed financial tension, the euro has depreciated rapidly against the dollar, which could lead to an improvement in the European firms’ competitiveness. The short-term outlook for the Union’s economy therefore appears to hinge on the progress of world demand. The fiscal adjustment measures taken to offset the budget deficits spawned by the crisis will presumably restrain the growth in domestic demand, which is likely to be very modest. In 2009 the European Union was again the world’s top exporter and importer of goods, but its foreign trade declined markedly compared with 2008. The persistent weakness of internal demand and the slide in raw materials prices were reflected in the value of imports, which contracted more sharply than the world average. Although the United States is still the main outlet market for the Union’s exports, in 2009 China was one of few countries where EU exports expanded and at the same time it consolidated its position as the Union’s leading supplier of imports. In addition to fashion goods and ICT products, of which the EU has been a net importer for years, China is beginning to score successes in some sectors of machinery and equipment, ousting the United States as the principal source market. Reflecting these developments, the EU’s normalized trade deficit with China reached a record level. Russia, which had enjoyed vigorous expansion in the last decade but was rocked by the crisis, saw its share of exports to the EU decline abruptly, although it did strengthen its position as a supplier of raw materials. The EU’s trade balances remained negative, but with disparate trends, in many medium/low-tech sectors, such as textiles and clothing, footwear (with a sharp deterioration), steel products and agricultural products. There was also a further widening in the deficit on electronic products, a sector in which the EU relies increasingly on foreign purchases. By contrast, the EU’s normalized surpluses grew in some medium/high-tech sectors of specialization, including transport equipment, mechanical machinery and equipment and electrical machinery and apparatus. The European Union also confirmed its global leadership as an exporter and importer of services, with a normalized surplus. Geographically, in 2009 the Union recorded its first deficit ever with the United States, its leading trading partner; the negative balance was ascribable to the deficits on construction and foreign travel. According to the latest available data, which refer to 2008, the European Union lost its primacy as a recipient of foreign direct investment. The uncertain outlook for the economies of the region and the diminished capacity of multinational corporations to maintain their previous financial commitments penalized the EU.