21 April 2010
Vanessa Rossi
(Former Chatham House Expert)


Against an already fragile background for the European economy, volcanic ash has cast doubts over predictions for strengthened growth in the second quarter and may have dashed hopes of a recovery this year. And it will make the European debt crisis worse.

After a poor start to the year, hopes had been pinned on a spring rebound. First-quarter results for European GDP will be closely watched after disappointing figures at the end of 2009 and weak monthly retail sales and industrial production indicators for early 2010. Trade is looking more positive but it remains to be seen if this translates into better GDP growth, and certainly Europe remains consumer-lite.

With March-April looking firmer according to confidence indicators and retailers' reports in the UK, predictions for a return to growth in the second quarter were encouraging. This could finally have lifted Europe into sustained recovery. Now volcanic ash has dealt a new blow.

Even if closures of air space are now over and business returns to normal in a couple of weeks, the impact will be similar to that of the January snow, which depressed growth at the start of the quarter. Not only are airlines facing a bill for compensation but events and trips have been cancelled for the coming weeks on the back of the recent disruption and uncertainty. Travellers' confidence has been severely shaken and this might even impact on prospects for the important summer tourism season.

Figures for business losses have continued to escalate. After a week of disruption, some estimates put the cost to the airlines alone at almost $ 2 billion. Impacts elsewhere in the European economy from airline disruption, knock-on effects (for example to jobs and investment spending) and the prolonged delay before stranded passengers can be rescued and business gets back to normal, all suggest that total business losses during April could easily mount to $ 5-10 billion, even assuming no further travel disruptions. This could shave 0.1-0.2% off second-quarter GDP for the EU, probably knocking growth back to zero and further delaying recovery.

In the worst-case scenario, in which the volcanic risk bubbles on, intermittently shutting down North European air space through the rest of the year, there would almost certainly be no economic recovery in Europe in 2010. Given already poor expectations for European growth this year, a relapse into a prolonged recession would not be ruled out. Travel and tourism losses alone would be heavy.

Tourism, on a very broad measure (including, for example, investments and local tourism), represents more than 9% of world GDP, according to the World Travel and Tourism Council, although visitor receipts (as recorded in export revenues) are much lower. Following this broad definition, the EU's travel and tourism industry could add up to around $ 2 trillion annually, of which the expenditure most at risk from the impact of air travel disruption might be worth some $ 1 trillion - most of which is earned in the summer months. On this basis, as much as $ 3-4 billion per day in tourism earnings could be at risk over the summer if the industry fails and tourists stay at home. Although it is unlikely that all of this year's revenue would be lost, a worst-case scenario might well imply losses of $ 150-300 billion in 2010 - equivalent to about 1-2% of GDP. However, the actual GDP impact might be mitigated by declining imports partially offsetting weaker exports and business earnings.

However, not all countries will be affected to the same degree. The worst impacts of closed air space would be felt in Northern European and those tourism destinations most dependent on air passengers from Northern Europe - such as the Mediterranean. For example, tourism accounts for 15-20% of GDP in Greece and a hit from fewer visitors would worsen what is an already dire economic situation.

Portugal is also at risk, as are the Spanish costas. Diverted travel and trade routes could bring some benefits to alternative hubs such as Vienna and Madrid, while tourist destinations in northern and central Europe that can be accessed by road and rail would also benefit. Regions with relatively low dependency on inbound air passengers for travel and tourism would also be little affected, perhaps including Scandinavia and East European countries such as Poland, Romania and Slovakia.

In the best-case scenario, if volcanic ash no longer presents a problem to flying and air traffic resumes to normal levels, we are likely to see airlines try to recoup their April losses through offers and discounts. While a bonus for European consumers, this will bite into airlines' already tight profit margins and revenues for tourist resorts.

Having survived the deep global recession, businesses can only take so much strain before they begin to buckle, and this in itself raises fears of a new wave of job losses and a yet more serious double dip into recession.