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April 20, 2010 6:03 pm
Europe’s volcanic ash cloud is disrupting car production and the tourism industry as well as causing chaos for passenger and cargo air traffic, but the long-term impact on the European economy is likely to be minimal, economists and businesspeople said on Tuesday.
If airline activity were to recover completely by the end of this week, the economic cost of the volcanic eruption in Iceland would amount to no more than 0.1 per cent of European gross domestic product, according to Jacques Cailloux and Silvio Peruzzo, of Royal Bank of Scotland.
However, some scientists warn that the outlook would be more serious if the April 14 eruption of Eyjafjallajökull volcanic glacier were to be followed by an eruption of nearby Katla volcano, which is larger and more dangerous. On each of the three other occasions during the past 1,100 years when the smaller volcano has exploded – in 920, 1612 and 1821-23 – Katla has erupted soon afterwards.
The ash cloud has closed hundreds of airports and stranded up to 7m people abroad, of whom 2m – less than 1 per cent of the European Union’s workforce – had expected to be back at their jobs on Monday.
On Tuesday the disruption spread to the car industry when BMW said it would halt production at three factories in Germany until Friday because of a shortage of interior and electronic parts normally delivered by air. Daimler, which makes Mercedes cars, said it might experience similar supply problems if European airspace remained closed.
But flexible work arrangements in the car industry will make it relatively easy for manufacturers to make up for lost output, and deliveries to customers are unlikely to be affected because they are not made by air, analysts said.
Tourism officials in Cyprus said that if restrictions on flights from Germany, Russia and the UK continued for another 10 days, the island would receive 50,000 to 60,000 fewer tourists this month than in April last year, causing a drop in revenues.
According to Erik Nielsen, chief European economist at Goldman Sachs, the investment bank, the temporary disruption to the air freight business is already being offset by increased use of road, rail and sea transport. He estimated that air transport accounted for just 0.2 per cent of gross value added in the 16-nation eurozone and 0.4 per cent in the UK. “If the disruption in the airline industry were to be contained to about a week – ie, until around Wednesday – then I expect the total effect on the economies to be minimal, with only a marginal knock to GDP in the second quarter,” he said.
An eruption of Katla might be another story, however. The ash clouds over Europe would be denser and, as US government geologists warned this week, might damage agricultural crops and harm livestock.
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