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Justin Yifu Lin: Recession risks rising in Europe

SEP . 12 2014

Europe now faces the risk of another recession, its third since the global economic crisis of 2008-09, and such a development would lead to a fall in exports and investment from China to the region, said former World Bank chief economist Justin Yifu Lin.

Chinese economist Justin Yifu Lin delivers a speech after recieving an honorary doctorate awarded by the Vlerick Business School and the Catholic University of Leuven in Belgium on Monday evening.

"The risk cannot be removed right now as the European Union (especially the eurozone) has not come up with the requisite structural reforms to improve its competitiveness," Lin, a leading adviser to the Chinese government and professor at Peking University, told China Daily in Brussels.

Lin was awarded an honorary doctorate by the Vlerick Business School and the Catholic University of Leuven in Belgium on Monday evening in recognition of his standing as one of China's top economists.

Lin's concern came after the eurozone's real GDP, according to the European Central Bank, remained unchanged in the second quarter of this year compared with the previous quarter. It also followed Germany and Italy reporting GDP declines by 0.2 percent in the second quarter, compared with the first quarter of this year.

The European economy has already experienced two recessions-in 2008-09 and 2010-11. To help wake up the economy, the European Central Bank cut its interest rate further last week, and consequently the exchange rate of the euro against the yuan fell to a new low of 7.95 on Monday compared with 8.68 on May 8.

Lin said the further depreciation of the euro, as a result of the loose monetary policies, would help boost exports from the EU.

However, the eurozone's competitiveness, according to the traditional formula used by multilateral lending institutions like the International Monetary Fund, should be a result of further structural reforms. Financial and debt crises, do not have their own currency. So if one were to use the conventional definitions it means currency deprecation in the entire eurozone," he said.

"If the eurozone currency depreciates further, this would cause a 'competitive depreciation of the dollar', which is something that the global economy is not prepared for," Lin said.

Lin's views on economic prospects within the EU found support from Duncan Freeman, a senior research fellow of the Brussels Institute of Contemporary China Studies.

Freeman said the eurozone is struggling to maintain growth, and recent figures show that it has been very poor or nonexistent.

"There is a real danger that growth will slip into negative territory," said Freeman.

He said following the recent ECB policy moves, the euro has weakened further. The combination of a weak European economy and the euro will have a negative impact on China as many of its businesses are still reliant on exports to the EU.

Filip Abraham, professor of international economics at the Vlerick Business School in Brussels, said Lin's judgment is correct as growth rates in most of the eurozone nations are around 0-0.5 percent.

"The figures have shown that the eurozone is not that far away from a recession. However, this will also largely depend on what will happen in Germany," Abraham said.

Talking of the fallout from an impending recession, Abraham said it would lead to the EU importing less products from China and Chinese enterprises slowing their investment plans in the EU, something that had gathered pace since 2008-09.

To help the global economy grow at a faster pace, Lin said it is important for the major economies to consider a "grand plan of infrastructure construction" to shake off economic stagnation and crisis.

Lin said Europe still has some room to improve its infrastructure and such a measure would boost its exports of technology and products.

China has charted plans to become "better connected" with other countries and is encouraging several African countries to build roads, railways and airports with capital and technical inputs.

"Such measures can help dispel fears that the euro and dollar would competitively depreciate and also help the world stave off economic stagnation," said Lin.

 

Key points from Lin

* China has the potential to maintain annual growth of 8 percent for the next 20 years if deepening domestic reforms are successful and global conditions permit.

* China must come to terms with three major challenges: income disparities, corruption and pollution.

* Lessons from China's economic takeoff can be copied by some African countries. China's dual-track approach to reform, which involves transitory protection for nonviable companies to maintain stability while liberalizing sectors where the country has comparative advantages, can be taken as experience for development.

* Decisions by the Ethiopian leadership and the successful shift of China's shoe-producing and other plants to Ethiopia have proved that Africa has great potential it can tap to achieve a dynamic economy.

* In shifting manufacturing to Africa, China and Europe can also benefit because they can offer technology, capital and export markets.

 

 

Reported by: Fu Jing

Source: China Daily

Edited by: Arthars