The Irish Independent reports that falling prices and plunging mortgage repayments are helping to soften the blow of savage tax hikes and pay cuts for thousands of workers, new figures show.
Many homeowners on big mortgages have been cushioned from the worst effects of reductions in take-home pay as their repayments have plummeted by up to €5,000 a year.
It has been estimated that the series of Budget measures increased the tax bill for a couple on a combined income of €75,000 by €3,000 a year.
KBC economist Austin Hughes last night said that seven successive falls in interest rates have offset levy-hit incomes.
"There is no doubt that, for those with a large mortgage, the impact of lower borrowing costs has been much more than the negative impact of higher taxes and levies," he told the Irish Independent.
Mr Hughes said that the impact of tax changes, deflation and falling tracker and variable mortgage repayments would vary from household to household.
But the combination of lower prices and mortgage repayments could encourage Finance Minister Brian Lenihan to inflict more severe levies and tax hikes in the next Budget.
Overall prices dived by 4.7pc in the year to May, which means we are now enjoying the biggest price drops in Europe.
And they will continue to slide, according to Ulster Bank economist Pat McArdle.
The cost of living has now plummeted by the steepest amount in over 75 years. That is bringing some relief to the 400,000 out of work and thousands whose pay packets have been hit hard by swingeing pay cuts and Government levies. However, the real beneficiaries are those with larger mortgages.
In May alone, the cost of goods and services fell by 0.5pc as the pace of deflation accelerated.
Reductions in mortgage interest repayments have been among the most dramatic. Home-loan repayments have fallen by 42pc in the last year.
A family with a €250,000 mortgage over 25 years would have been paying €1,550 a month last September if they have a tracker, which is set at 1.5pc over the European Central Bank rate.
The monthly mortgage repayments will have fallen to €1,118 now, to give a monthly saving of €432.
Rents are down 16pc, furniture down 6pc, food down 2.5pc and clothes down 12pc, Consumer Price Index figures from the Central Statistics Office out yesterday showed. Also coming down were medical costs and the price of a visit to a GP.
Electricity prices fell 10pc last month and gas was down 11pc, but they are both still dearer than a year ago.
Bucking the trend of sharp price falls was a huge hike in insurance costs.
Home insurers hiked premiums by a whopping 25pc at a time when the cost of rebuilding damaged houses plummeted by 5pc.
Car insurance premiums rose by 12.5pc over the past 12 months, despite a record reduction in the number of deaths on our roads. Health insurance soared by 21pc, partly due to a new Government levy.
Apart from the insurance rises, the cost of many goods and services is plunging.
The price falls are set to soften the blow of April's savage Budget, which saw the income levy and the health levy doubled, as well as changes to the way PRSI (pay related social insurance) is calculated.
Mr Hughes said the levy hikes in the April emergency Budget and last October's hairshirt Budget are estimated to have pushed up the tax bill for a couple earning a combined €75,000 by about €3,000 a year.
Most of those lucky enough to still be still in a job are reeling from pay cuts, with large numbers of private sector workers seeing their wages cut by 10pc.
And yesterday another 160 jobs were lost with the closure of the Braun factory in Carlow. The company has issued a statement which says 100 employees out of the current workforce of 260 will be transferred to the sister Newbridge plant.
There are now 402,100 on the Live Register seeking unemployment benefit or allowances.
The Irish Independent also reports that the Government may have to show the EU that Anglo Irish Bank has a chance of becoming viable again, or else outline plans for an orderly wind-down, to get the nod from Brussels for its planned €4bn bailout of the embattled lender.
All EU banks receiving government assistance would come under new draft EU Commission guidelines which say governments must show how a bailed-out bank "will restore long-term viability without state aid as soon as possible, or if this cannot be achieved, how it will be wound up in an orderly fashion".
In Ireland, Anglo, which has already been nationalised, looks certain to be the biggest test case under the new guidelines.
The unpublished EU document says banks "may be required to divest subsidiaries or branches, portfolios of customers or business" units.
The guidelines, which didn't mention any specific banks, would also require stress tests before aid approval is granted.
Government sources pointed out that the EU has already approved the €3.5bn recapitalisation of both Bank of Ireland and Allied Irish Banks without any such conditions.
But the State is looking for Brussels to approve its planned cash injection into Anglo, which recently warned loan losses could hit €7.5bn.
Both Anglo and the Department of Finance have indicated they would entertain offers for some of the bank's loan portfolios, at the right price. A number of players have expressed an interest in its €10.3bn US loanbook. The bank is currently drawing up a business plan.
Funding
Anglo chairman Donal O'Connor told an Oireachtas committee this week that the board of the lender considered an "orderly wind-down" of the bank, but had been advised that a significant part of its funding would be pulled as a result.
Taoiseach Brian Cowen told the Dail on Wednesday the State would be responsible for up to €64bn of deposits if the bank was wound up.
But Neelie Kroes, the EU competition commissioner, told finance ministers this week that banks must be viable in order to receive approval for state aid.
"By restructuring, I mean tackling the problem of impaired assets, the problem of insufficient capitalisation and the problem of banks' business models, risk management and governance in general," Ms Kroes said.
The Irish Times reports that Aer Lingus plans to cut all flights from Shannon airport to New York and Chicago from its winter schedule in a bid to stem its mounting losses.
The Irish Times understands that the controversial decision will be announced by the airline at about lunchtime today, along with plans to cut services from Dublin to Washington and San Francisco.
Aer Lingus’s decision to downgrade Shannon this winter is likely to provoke considerable anger among lobby groups in the west of Ireland, who will be fearful of the potential negative impact on investment by US companies in the region if direct links between the two are diminished.
The cuts will take effect in late October and run until March. It is not clear if the flights will be restored for the summer season. A decision will not be made for several months.
It is understood Aer Lingus will retain a service from Shannon to Boston, operating four times a week.
This will come as a major blow to Shannon airport, which handles about three million passengers a year.
The direct link with New York’s JFK airport, in particular, was seen as symbolic at Shannon.
US carrier Delta Airlines yesterday said it was pulling its scheduled transatlantic services from Shannon from October. However, the Continental Airlines route to Newark, outside New York, will continue.
Ryanair has also reduced its short-haul services at Shannon in response to a decline in consumer demand.
Aer Lingus became embroiled in a major political controversy in 2007 when it cut its daily flights from Shannon to London Heathrow and switched the valuable slots to a new base in Belfast.
This resulted in a number of redundancies at Shannon airport and led to a war of words between the airline, Minister for Transport Noel Dempsey, Opposition parties, trade unions and lobby groups. At that time, the Minister refused to intervene to force Aer Lingus to reverse the decision.
That decision was taken by then chief executive Dermot Mannion, who has since left Aer Lingus. Chairman Colm Barrington is likely to take the flak for the latest decision given that he has assumed executive responsibility while the search for a new chief executive continues.
Aer Lingus’s service to Heathrow was restored in March this year, with two flights a day operating between the airports. It is understood Aer Lingus is seeking to boost the Shannon-Heathrow service to three per day.
As part of the cutbacks in its Shannon and Dublin services, Aer Lingus is expected to ask staff to take unpaid leave. These decisions are part of a wide-ranging plan to cut costs at Aer Lingus, which is expected to record losses of more than €100 million this year.
In May, Aer Lingus carried just 90,000 passengers on its transatlantic services compared with 114,000 in the same month of 2008 – a decline of 21 per cent. In the year to date, traffic on these routes has declined by 14 per cent to 417,000.
Mr Barrington told shareholders at its annual general meeting last week that one in four flights between the US and Ireland was effectively flying empty. In addition, the average fare that the airline has achieved for its transatlantic services has declined sharply. Aer Lingus has had an almost continuous sale this year on long-haul flights.
In May, Aer Lingus said it was pulling six routes and three aircraft from its base in Belfast for the winter months. It is also planning to mothball one aircraft at Dublin airport.
The airline has been hit by declining consumer demand and a weak dollar affecting tourist numbers coming to Ireland from the US.
The Irish Times also reports that Setanta Sports founders Michael O’Rourke and Leonard Ryan have secured an international backer that could help them secure the future of the Dublin-based pay TV sports broadcaster.
Mr O’Rourke and Mr Ryan will put an offer for a majority stake in the cash-strapped business to the company’s directors at a board meeting in London today.
This offer is backed by a major international group and will involve an investment of about £50 million (€58.7 million) in the company.
This will result in Mr O’Rourke, Mr Ryan and their backer taking a majority stake in the business.
If accepted, other shareholders, including private equity firms Balderton Capital and Doughty Hanson, which owns TV3, would have their holdings in the Irish firm diluted.
A deal would also secure about 450 jobs at the broadcaster, including about 200 in Ireland.
Setanta, which is loss-making, urgently needs an injection of cash to prevent the company from slipping into administration.
Mr O’Rourke and Mr Ryan have worked around the clock this week to secure a rescue package to save the company they founded in 1990.
Accounting firm Deloitte was placed on standby to act as administrator to the business if new investment could not be secured.
Setanta has committed close to £1 billion in recent years to secure live rights to top sports including Premier League football and the FA Cup in England, the Scottish Premier League (SPL), PGA golf in the US, Uefa Champions League football and Formula One motor racing.
Earlier this month, Setanta missed a £3 million payment due to the SPL. It was reportedly due to make a £35 million payment to the Premier League in England this week.
Its difficulties began in February when Setanta lost one of its Premier League live rights packages to Sky. This means it will only be able to show 23 live games from August 2010 for three seasons.
In parallel with seeking new investment, Setanta has sought to renegotiate its various rights deals with rights holders. It is believed to have sought discounts of up to 25 per cent from rights holders. The firm has sought to trim other costs within the business in a bid to put the company on a footing to reach breakeven.
Failure to agree a deal today could push the company towards administration. This would result in its rights reverting to the various sporting bodies and could result in Setanta being broken up.
The Irish Examiner reports that Ireland has no future in low-cost manufacturing and cash-strapped companies should focus their business efforts on exports and trade with new world economies, the head of Enterprise Ireland has said.
Businesses were still finding it difficult to access credit from banks, an Oireachtas committee was told.
However, a new generation of Irish companies with international links involved in the smart economy were making healthy profits, Enterprise Ireland chief executive Frank Ryan said.
New figures released by Enterprise show Irish exports grew by 3% last year. Companies linked with Enterprise Ireland saw over 8,000 job losses during the same period, 65% of which were linked to the construction sector.
Mr Ryan said the way forward for businesses was through the smart economy, leaving behind an old industrial era.
"There’s no future in low-cost manufacturing," he added.
There were small companies with links to technology and computing making turnovers of over €50 million, he told the Public Accounts Committee (PAC).
Anglo Irish Bank had given €350m in credit to companies since the start of the year, but accessing finance was still a difficulty for many businesses.
Enterprise Ireland said a number of its senior management staff had received bonuses in 2007.
The top bonus paid was over €40,000, while another 16 managers received between €10,000 and €16,000 above their salaries.
Mr Ryan said businesses needed to target new economies like Brazil, India, China and Russia among countries.
Meanwhile, the committee also heard yesterday how a Science Foundation Ireland computer system cost double its original price.
"Weak project governance" was to blame for the near €400,000 computer system, which in the end was only partially used by SFI, committee members were told.
The foundation’s director general Frank Gannon admitted there had been "inadequate scoping out" of the project.
Changes had since been introduced on the payment and checks of projects, committee TDs were told.
Mr Gannon meanwhile told the committee more career guidance was needed in schools to encourage students to take up engineering, maths and science subjects.
"We need to establish that jobs in that area are not ‘strange’ but that they are normal jobs."
The Financial Times reports that even as US regulators turn inward and focus on improving their own system, their counterparts in Europe are requesting more international co-operation.
The Committee of European Securities Regulators this week publicly tried to revive “mutual recognition”, which would allow brokers and exchanges registered with European authorities to sell directly to US customers and vice versa.
Most global companies strongly favour such agreements because they would no longer have to register and comply with multiple agencies, but critics fear local companies would lose sales and differing international standards could put small investors at risk.
The idea is not a new one: EU and US authorities have been discussing it since 2005 and the US Securities and Exchange Commission struck just such an agreement with its Australian counterpart last year, although the details are still being worked out.
The financial crisis put the process on the backburner, and Christopher Cox, the US Securities and Exchange Commission chair who had championed the idea, stepped down after the US presidential election.
Now the EU is trying again. The CESR on Monday called for submissions on the process and plans to publish a consultation paper later this year that lays out areas of high priority and common ground. For example, it may be easier to negotiate a mutual recognition agreement for brokers who sell only to professional investors than those on the retail side.
“It’s all looking very positive on the European side. What we have to do is see that the US is equally engaged,” said Anthony Belchambers, chief executive of the Futures and Options Association, which strongly supports the mutual recognition process.
In the US, industry groups are generally supportive of the idea.
“Mutual recognition and other approaches can reduce or eliminate regulations which are conflicting or duplicative, creating a better operational environment for our companies, our regulators and our customers,” said David Strongin, managing director at the Securities Industry and Financial Markets Association.
But the US has historically prided itself on having tougher standards than other financial markets and many politicians are loath to dilute US rules.
Just last year, Congress hearings blamed rising commodity prices on the “London loophole” in commodities markets and tried to impose new rules on futures and options linked to US contracts even when sold outside the US.
Mary Schapiro, the new SEC chairman, has said very little on the issue and the SEC’s recent international efforts have focused on preventing the next financial crisis. Mutual recognition is unlikely to be high on the US agenda until the outlines of regulatory reform in both the US and Europe are clear.
“After all, you have to know what you are agreeing to,” said one person familiar with the commission’s thinking.
The FT also reports that Alistair Darling warned on Thursday Britain’s economic recovery could be held back by rising oil prices and a failure by other European countries to clean up their banks.
Describing himself as “confident but also cautious” over the prospects for the economy, the chancellor of the exchequer has been buoyed by recent economic forecasts suggesting the UK is moving out of recession. But he will warn at a G8 meeting in Italy this weekend there are still clouds on the horizon.
The chancellor suggested some European countries had been turning a blind eye to the problems in their banks and had failed to follow Britain’s lead in identifying toxic assets and recapitalising institutions.
“If there is a problem it doesn’t get any better by walking around it and hoping it will go away,” he told the Financial Times in an interview.
Although he did not mention any EU countries by name, Treasury officials are worried about the pace of banking reform in countries including Spain, Sweden and Germany.
Mr Darling recalled that in his last FT interview he faced questions about comments by Peer Steinbrück, Germany’s finance minister, who criticised Britain for “crass Keynesianism” by cutting VAT and saddling future generations with debt.
But the chancellor argued that the tax cuts announced last November had bolstered Britain’s economy, although he pointedly said he did not want to “lecture” Mr Steinbrück on how to do his job.
Forecasters have said that Britain’s economy may be growing again, although Mr Darling said he was sticking to his Budget forecast and expected the recession to finish towards the end of 2009.
But Mr Darling warned that a high and volatile oil price “has the potential to be a huge problem as far as the recovery is concerned”. Oil prices moved above $73 a barrel on Thursday for the first time since October after the International Energy Authority said that the rise in the oil price was justified, in part, by higher oil demand.
The chancellor said he was keen to restart international efforts to increase the transparency of oil supply and demand and hoped that even Gulf states would see that it was in their interest not to allow high oil prices to snuff out a recovery.
Mr Darling also signalled he had no plans to announce a spending review, as would be normal, this autumn. Treasury officials were concentrating on efforts to improve the efficiency of government spending, the chancellor said. They had not started the necessary work to undertake a spending review because, as Mr Darling said, the outlook was far too uncertain to be setting plans for 2014.
“No matter how tempting, it would not be sensible to try and nail down how much we would be spending, say on nursery education in 2014, now.”
If a spending review was published on the basis of already announced spending totals, it would show big cuts for most government departments after adjusting for inflation. Robert Chote, director of the Institute for Fiscal Studies, said: “The real choice is between Labour cuts and Tory cuts.”
The New York Times reports that flanked by a coterie of lawyers and lobbyists, Kenneth D. Lewis, Bank of America’s embattled chief executive, walked into yet another Congressional hearing room on Thursday as the sole witness in a merger drama that has shadowed his banking empire for months.
But this time, lawmakers turned the spotlight on personalities who were not seated in the chamber: the federal officials who had pushed him to complete a troubled merger with Merrill Lynch late last year, despite knowing that huge losses riddled the once-mighty Wall Street firm.
Those officials, most prominently Ben S. Bernanke, the chairman of the Federal Reserve, and Henry M. Paulson Jr., the former secretary of the Treasury, will be called to testify before lawmakers soon. But the twists and turns of their conversations with Mr. Lewis came into full view on Thursday, through scores of e-mail messages and other documents from the Federal Reserve and Bank of America obtained by The New York Times.
Bank of America announced its deal with Merrill in September, as financial markets were seizing up and Lehman Brothers fell to its knees. But Mr. Lewis grew less certain once the bank discovered that Merrill’s finances were worse than imagined, and considered pulling out of the deal.
On Thursday, Mr. Lewis maintained that federal officials pressured him to keep the merger alive, and acknowledged that his job had been at risk if he did not. But he resisted lawmakers’ efforts to characterize the situation as a threat. And he backed away from earlier statements in which he suggested that Mr. Bernanke and Mr. Paulson had urged him not to reveal Merrill’s troubling state before the merger was sealed, calling them “two honorable people” who had “good intentions.”
“It’s important to remember that we have heard only one side of the story today,” said Edolphus Towns, a Democrat from New York who heads the House Committee on Oversight and Government Reform, which held the hearing. But, he said, “the regulators and financial institutions seemed to be making up the rules as they went along.”
For a merger once hailed as the way forward for Wall Street, the backstory keeps getting messier. The bank’s executives, including Mr. Lewis, face continued scrutiny from regulators and pressure from shareholders.
And Mr. Paulson and Mr. Bernanke, who thought preserving a deal would keep markets calm in the thick of the financial crisis, are being questioned on whether they pressured a company’s executives into ignoring their duty to their shareholders.
According to notes taken by Bank of America executives to record their conversations with regulators at the time, Timothy F. Geithner, now the secretary of the Treasury, and Lawrence H. Summers, currently the president’s lead economics adviser, were also aware of the effort to seal a merger as the Bush administration prepared a transition to the incoming administration of Barack Obama.
Mr. Lewis, for instance, typed up notes from a phone call he had on Dec. 31 with Mr. Bernanke on the subject of the merger. According to the notes, which were provided to the Congressional committee by Bank of America, Mr. Bernanke told him: “Geithner, Sommers and Paulson up to date. Geithner would like to see what is done as a template for the industry.”
On Thursday, Mr. Lewis said in the hearing that he had never spoken directly with either Obama administration official.
Among the additional documents obtained by The Times on Thursday were more notes from Bank of America’s chief financial officer, Joe L. Price. “Tim can’t/isn’t directly engaging with 3rd parties — tough confirmation hearings et al coming,” Mr. Price wrote from a conversation he had with Kevin Warsh, a Federal Reserve governor.
A spokesman for Mr. Geithner said Thursday: “It was perfectly natural and appropriate that the incoming Treasury secretary would be kept apprised of key developments but he was not making decisions for the government.”
A spokesman for Mr. Summers said that he “had occasional conversations with Federal Reserve officials during the transition, but was not involved in any decision-making regarding financial institutions.”
The Federal Reserve declined to comment on the notes related to the phone calls.
If Mr. Lewis had tried to exit from the merger, it would have involved a fight over the bank’s “material adverse change” clause, known as M.A.C., in the deal. Unlike in some deals, that clause did not include an automatic resetting of the price for Merrill if the investment bank suffered losses. Mr. Lewis acknowledged at the hearing that he did not know whether the bank could have won a lower price or exited from the deal if he had used that clause.
Lawmakers read from e-mail messages sent by Jeffrey Lacker of the Richmond Federal Reserve Bank to his colleagues after a conversation with Mr. Bernanke, whom Mr. Lacker said believed that “the M.A.C. threat is irrelevant because it’s not credible.”
Mr. Lewis said at the hearing: “This was not some wild bluff.”
One lawmaker, Dennis Kucinich, a Democrat from Ohio, read from e-mail messages between other Federal Reserve officials that said Mr. Lewis had asked regulators to issue a letter that said the government had ordered him to close the deal with Merrill.
But regulators refused. “We shouldn’t take him off the hook by appearing to take the decision out of his hands,” one employee of the Federal Reserve wrote, according to Mr. Kucinich.
Mr. Lewis said he did not recall requesting a letter of that sort. But he said he requested written details of the assistance that the government would provide.
When Mr. Bernanke appears before the House committee, he is likely to be questioned about whether he instructed bank officials to avoid or delay disclosing Merrill’s weakened state. Mr. Bernanke wrote in a letter to Mr. Kucinich in April that he and others at the Fed did not.
Mr. Lewis reiterated Thursday that government pressure did not extend to the bank’s decision not to disclose Merrill’s problems. But that contradicted testimony Mr. Lewis gave to the attorney general of New York early this year, according to a transcript. And internal Federal Reserve documents released on Thursday raised more questions about Mr. Bernanke’s denial.
For instance, one senior official in the Federal Reserve Bank of New York, Arthur Angulo, wrote on Dec. 22 that the timing of any Merrill disclosure was a “critical issue.”
In an e-mail message to colleagues, Mr. Angulo said he planned to call Merrill to “steer” it toward later disclosure. Four hours later, Merrill’s chief financial officer received that call from Mr. Angulo and then documented it in an e-mail message.
“His hope is that there is no disclosure prior to BOA quarterly announcement,” the chief financial officer wrote. “We told him this was the current plan,” adding that he was told to alert the Fed if that plan changed.
The NYT also reports that there was more evidence Thursday that the United States economy might be stabilizing, if not rebounding, even as economic reports in Europe remained gloomy.
The American news — showing slight growth in retail sales and a dip in first-time jobless claims, as well as rising stocks — was not enough to end the disagreement between bulls and bears over how soon the economy would improve.
But the apparent divergence of fortunes between America and Europe highlighted the different approaches to solving the financial crisis, and why some economists say the more aggressive American strategy may be working better, at least for now.
It is a debate that is likely to be one of the issues dominating discussions when finance ministers from the eight largest economies meet in Italy this weekend.
Some private economists are even predicting that the American economy will resume growth in the fourth quarter, while Europe’s economy is expected to remain in recession well into 2010, after contracting an estimated 4.2 percent this year compared with an expected 2.8 percent decline in the United States.
“The shock originated in the U.S., but Europe is paying a higher price,” said Jean Pisani-Ferry, a former top financial adviser to the French government who is now director of Bruegel, a research center in Brussels.
Almost from the beginning of the crisis, the United States and Europe chose largely different paths to aiding their economies. The most stark was Washington’s willingness to commit hundreds of billions of dollars to stimulus spending — in addition to moving aggressively to shore up banks and keep credit flowing — versus Europe’s worry that similar spending would increase inflation in the future.
Just as the policies pursued during the Great Depression have been dissected ever since by economists, the fate of the United States and Europe as the two regions emerge from the global crisis will be analyzed for decades to come.
The lessons will not only guide policy makers in future crises, but also could redefine the debate over how much state intervention in the economy is appropriate.
“History is one big laboratory experiment that only gets run once,” said Niall Ferguson, an economic historian at Harvard who has been one of the loudest critics of the White House’s spending initiatives.
The argument behind the American approach — staggering stimulus spending — is that the economy must be prevented from falling into a self-perpetuating downward spiral, and that increasing the deficit to do that is prudent.
One crucial concern about America’s increased deficit spending — that it would lead investors to demand higher interest rates on United States debt, making it far more expensive to borrow and slowing the economy — has been allayed, for now. An auction on Thursday of $11 billion in 30-year Treasury bonds found enthusiastic buyers, helping to push the Standard & Poor’s 500-stock index to a seven-month high.
But it is impossible to know how much the apparent, if nascent, stabilization of the American economy comes from the stimulus spending and how much from moves like propping up the banking and credit systems, especially because much of the stimulus money has yet to make it to the economy.
“I think America is further ahead in terms of fixing problems with the banks,” said Mr. Pisani-Ferry, “and countries like Germany have been hurt tremendously by the decline in world trade.”
Figures released this week showed that German exports plunged 28.7 percent in April from a year earlier, the steepest drop since the government began keeping records in 1950.
Still, some experts say that Europe’s approach could pay off over the longer run.
There remains a significant risk that deficit spending in the United States could lead to inflation in the long run. Concern over the deficit has already led to a sharp rise in interest rates in the last month. A continued rise could threaten any American recovery.
And while its growth is expected to be muted for years, Europe will not be burdened by as much debt as the United States, having avoided big stimulus spending.
Moreover, many American financial institutions remain larded with bad loans. And some of the banks the government recently allowed to leave the Troubled Asset Relief Program could need additional government help if the economy worsened instead of rebounding.
Underscoring the risk that hopes for a quick turnaround anywhere may be premature, the World Bank said Thursday that it expected the global economy to shrink by nearly 3 percent in 2009, far deeper than the 1.7 percent contraction it predicted just over two months ago.
And both Europe and the United States face the specter of rapidly rising unemployment, even if a rebound is beginning.
The Organization for Economic Cooperation and Development estimates that from 2007 to 2010, developed economies will have shed some 25 million jobs. The unemployment rate in both the euro zone and the United States is expected to rise above 10 percent next year.
“That pace of increase has never been experienced in the postwar period,” said Jonathan Coppel, a senior economist at the Organization for Economic Cooperation and Development. “This is going to create a headwind.”
When the Treasury secretary, Timothy F. Geithner, first met with other finance ministers representing the 20 largest economies in March, he urged his European counterparts to increase stimulus spending. But in Italy, Mr. Geithner will press them to replicate the stress tests applied to American banks.
During a conference call with reporters Thursday, Robert B. Zoellick, the president of the World Bank, reiterated the need for such tests.
“A stimulus without getting the credit markets working again is like a sugar high,” Mr. Zoellick said. “I would put a higher focus on getting credit markets working again, getting banks recapitalized and cleaning up bad debts.”
