Eurozone’s summer of discontent
Category: Thought for the day
Is this it then? Opinion is split over the Eurozone. The optimists have said it just needs time, to keep going, accept the pain, and gradually things will improve. The pessimists have said that the current strategy is not sustainable. Recent data has been vaguely encouraging. But as ever with these things ‘events dear boy’ mean that we may be approaching the nasty point that the pessimists always said was inevitable. Can the EU itself survive?
Such was the faith, the rhetoric and the confidence expressed by Eurozone leaders and many analysts in the region that I began to wonder if I was wrong. Was the region on the mend bit by bit? Take Spain as an example; last month it reported its first trade surplus in 40 years. The latest PMI tracking Spanish manufacturing hit 50 – a reading consistent with zero growth – a 26 month high. Okay zero growth is not very much, but it is the trend that matters, and the Spanish PMI has been steadily improving for months. If the improvements can carry on for just a little longer, then at last we may be seeing an expansion in Spanish manufacturing.
As it happens, according the recent PMIs, the only country in the region where manufacturing is expanding is Ireland, and even there the growth rate is tiny. But once again, the trend is encouraging, with the PMIs for Greek manufacturing hitting a 24 month high, and the Italian equivalent being at a 23 month high.
There has been sort of good news on government borrowing. Ireland appears to be on track to meets its fiscal targets for 2013. In Greece the deficit has fallen sharply and there is a chance that the country will post a primary surplus this year – that is to say a surplus before interest payments on debt.
That, in a nut shell, is the argument put forward by the optimists. Just give the indebted parts of the Eurozone time.
And yet, if we pull back and look at the big picture, what we see is still distinctly alarming. At the end of last year, gross government debt to GDP was greater than 100 per cent in Greece, Portugal, Ireland and Italy. At the end of last year, total external debt to GDP was 200 per cent in Greece, 227 per cent in Portugal, and an extraordinary 410 per cent in Ireland.
But challenges don’t only apply to the five countries that make up the so-called PIIGS. In Belgium gross government debt to GDP is more than 100 per cent. At the end of 2012 total external debt to GDP was 234 per cent in Belgium and 254 per cent in the Netherlands.
Then there is the issue of debt maturing this year, or in 2014. In this respect at least, Ireland does not have a major problem, but for Greece, Portugal and Spain debt maturing over the next two years is worth more than 20 per cent of each country’s GDP. In the case of Italy, the ratio is 31 per cent.
As we all know, the level of unemployment across much of the Eurozone’s more troubled areas is truly horrendous. There has long been a question mark over whether the electorate in the adversely stricken countries was willing to tolerate such pain. In such circumstances political instability is a constant risk, and indeed recently we have seen political discord in Italy, Greece and now Portugal.
Now, or so it appears, we are in the early stages of entering a new era of higher interest rates – a post QE world. The markets have focused much of their attention on emerging markets, b–ut I think the real problems areas are much closer to home. If interest rates are to rise over the next two years – and it seems they are – it is very hard to see how some of the Eurozone’s more indebted countries will be able to pay their way. By the way, this point applies to countries we have previously thought of as being quite successful, such as the Netherlands. Outside the euro area, Sweden and poor old Blighty may face serious challenges. And looking further afield, the word crisis may seem applicable to the economies of Canada and Australia.
Yesterday saw bond yields in Portugal, Greece and Spain surge.
It is simply not sustainable. Either we must see huge debt write-downs, or Germany – and pretty much only Germany – must ride to the rescue.
In 2012, of the euro area’s 11 largest economies only Germany posted a budget deficit.
The good news is that it does appear that while some leaders seem almost comatose in their complacency, Angela Merkel has at last woken up. She has finally realised that youth unemployment in parts of Europe threatens to destroy the entire EU project.
We may find that austerity starts to lessen after the German election.
Yes many parts of the euro area have to deal with their bloated public sectors, and yes parts of the region have to implement reforms to make their respective labour markets more flexible. But austerity will not do the trick. There has to be stimulus too. There has to be huge investment, and until the ECB stops obsessing about a non-existent inflation threat, and embarks on its own QE to counter-balance the effect of tightening US monetary policy, the region will either continue to stay in depression, or indeed the EU itself may collapse.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees