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Europe's economies

Spreading infection

Mar 3rd 2011, 12:00 by The Economist online

THE fear that Greece's sovereign-debt crisis might presage similar episodes elsewhere in the euro zone has been borne out. In November, Ireland joined Greece in intensive care, becoming the first euro-zone country to apply for funds from the rescue scheme agreed in May 2010 in concert with the IMF. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) have risen sharply in other euro-zone countries, notably Portugal, but also in Spain. Promises to tackle budget deficits through public spending cuts and tax increases have offered little reassurance to bondholders, who know that austerity will hold back already-weak GDP growth.

The interactive graphic above (updated March 3rd 2011) illustrates some of the problems that the European economy faces. GDP picked up in most countries through 2010 but there were marked differences in performance. Germany was especially sprightly: its economy rose by almost 4% in the year to the third quarter. But GDP in Greece has crashed under the weight of austerity; Ireland has yet to emerge convincingly from a deep recession; and Spain’s economy is barely growing. It is notable that GDP countries outside the euro, such as Britain, Poland and especially Sweden grew at a faster rate than the euro-zone average in the year to the third quarter.

In many countries unemployment has not gone up by as much as one might expect given the depth of the crisis. Germany now has lower unemployment than before the crisis, thanks in part to a short-time working scheme and flexible time arrangements in its manufacturing sector. The worst-affected countries include Ireland and Spain, where a collapse in construction has swollen the dole queues. Britain has fared better because its tight planning laws limited the growth of its construction sector during the global housing boom.

Weak growth and high unemployment spell particular trouble for countries that already have high levels of public debt. That explains why Greece was first to lose the confidence of the markets with a public-debt-to-GDP ratio of 127% and a budget deficit of 15.5%. In 2009, it was the euro zone's outlier country. Both Ireland and Spain had low public debt coming into the crisis, but a combination of recession and big housing busts blew a hole in their tax revenues. Ireland was, in the end, undone by fears that the state could not backstop its banks. Spain is now scrambling to avoid a similar fate. Others are pruning before the markets exert real pressure: Britain's debt has the longest maturity of any EU member but it is still aiming to get its finances in order within four brutal years.

AUDIO:  Our correspondents on why struggling euro-zone economies should restructure their debt sooner rather than later.

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1-20 of 26
pedrolx wrote:
Dec 6th 2010 12:30 GMT

What is the point of feeding the endless stupidity of bailouts like the IMF is doing now? There simply should be no more bailouts.

Spain's economy is, like Ireland's (and Greece's) a bit bloated, but it is (at least for me) intriguing that the rating's agencies, on which investors rely to make decisions, kept the Irish bonds with an AA rating (when they ARE junk now, there's no point in denying it) and have downgraded both Portugal and Spain! I do feel discriminated!

As to Portugal, out of the other three, we are perhaps the only ones with a fair and honest economy that reflects our poverty in relation to the rest of Europe, we had no estate bubbles, our banks are pretty solid with assets not only in Europe but in other Portuguese-speaking nations, and the state of our public finances is something that has been subject of debate for a while now (since 2003), during Barroso's government - which brought about the idea that we might be overspending, and an effort has been made to keep it under the EU 3% since (notice how france keeps getting away with having deficits higher than 3%, without being forced to pay fines!). This government we have now actually managed to have a fairly balanced public finance system from 2005 to 2007, and it was only after the subprime crisis in the US that the deficit went awol, but it did EVERYWHERE not just here. And I cannot fathom why on earth would the rating's agencies downgrade US, and not do it to countries in similar situations to ours, I will have to say Britain again for instance, or France. Ok in times of crisis you sacrifice the smaller ones, but I do think it's irrational and has done nothing to help this nation in getting back on its feet! We are not very rich, and we know it. The tax I pay serves to pay two subsidies for people in need. I strongly disagree with the idea that instead of that, it's being used to feed some kind of hedge fund or vulture fund, instead of being used for its real purpose. ANd I do think the media and the rating's agencies are partly to blame, sorry Ambrose and all the others!

pedrolx wrote:
Dec 6th 2010 12:30 GMT

Portuguese and Spanish exposure to the big four economies and the other way around:

ortuguese and Spanish exposure to British, French, German, and Italian banks (in millions of US$)

exp--------Brit-------Fran-------Germ----------Ital-------Spain------ Portugal
Port______22,400_____41,904______37,240____4,734______78.288______----
Spain_____110,845____162,439____181,648____25,552_____---______23,086

and now the other way round
exp--------Port---------Spain
Brit......7,718........386,370
Germ......3,925.........39,080
France....8,209.........26,261
Italy.....3,403.........32,635

and finally public finances:

public deficit:

Ireland: 32%
Britain: 12%
Portugal: 8%
Spain: 7%

public debt:
Ireland: 110%
Britain : 80%
Portugal:80%
Spain:40%

so can anyone please tell me WHERE THE HE** IS THE CRISIS IN IBERIA???????

This is just an attack on the euro. I think the likes of the IMF (which already have a history in supporting dictatorships in Latin AMerica) and the rating's agencies (which keep downgrading Portugal and Spain yet keep the Irish AA rating when their bonds are definitely junk now after the bailout) role in this crisis should be carefully examined by impartial journalists.

Thanks, and regards

Prakhar Singh wrote:
Dec 6th 2010 3:30 GMT

The recent Irish banking crisis clearly depicts that Euro makes little sense, because the European Union lacks taxing, spending and regulatory authority which are critical in managing a modern economy.

The U.S. federal government regulates banks and financial institutions and ensures deposits because continuously functioning banks are as essential to modern economy as uninterrupted electricity, infrastructure and the Internet. Ireland government, not the EU, regulates and ensures the solvency of Irish banks.
Irish treasury doesn’t have the cash or borrowing capacity to recapitalize troubled Irish banks, Without an EU rescue, Ireland's banks default, its government defaults, or its citizens face cuts in government services which will make their life miserable.

Had Ireland continued with its own currency, it could have been in the position to print money inorder to recapitalize its banks -- that is exactly what the Treasury and Fed can do for the FDIC, Citigroup, Bank of America, and other financial institutions, or RBI for India.

Printing money would have pushed down the Irish pound against the dollar and other currencies, resulting in some inflation and lower Irish living standards, as bank losses would have spread over the entire economy. However, over several years Ireland's trade balance would have improved, and provided they didn’t take any foolish steps, the Emerald Isle would have worked out of its mess. read more.....
http://www.businessnbeyond.com/2010/11/fundamental-loop-holes-in-euro.html

Cutters wrote:
Dec 6th 2010 4:13 GMT

Even the IMF thinks that the euro-zone is going to need a bigger bailout fund.

Man the life boats! The pumps are just putting off the inevitable, the world can see that. Better make that a gold one!

pedrolx wrote:
Dec 6th 2010 4:37 GMT

this data isn't true either Portugal is expected to grow by 1.5% this year

Rune Lagman wrote:
Dec 6th 2010 8:37 GMT

The ECB should quite simply buy European sovereign debth until the interest rates comes down to German bund level. The ECB owns the Euro printing press - USE IT.

Case closed.

Beleg wrote:
Dec 6th 2010 9:21 GMT

The belgian national Bank is now forecasting a GDP growth of 2.1% for 2010. I guess it's worth updating the data.

jdaw1 wrote:
Dec 6th 2010 10:46 GMT

The Economist has included amongst its infection measures “Average debt maturity”, which is a bad approximation to what should be wanted, and further has mis-calculated this average maturity. In reverse order:

Gilts are the oldest debt market market in the world, and there are eight perpetual gilts, which pay coupons forever. (Technically they are ‘callable’, so the government may choose, but can never be compelled, to redeem them at par.) Maturity: infinity. They’re small, but when computing an average, only a little infinity is needed to take the average all the way. Average gilt maturity = ∞!

Imagine a government for which 99% of its debt is funded in one-week T-bills, and 1% is funded with a 1500 year bond. Average maturity: 15.01 years, the longer than any on the chart. Proportion of debt that must be refunded every week: 99%. Scary!

A better question is to ask what proportion of the debt (or of GDP) must be re-financed within three years. For some debt profiles, this proportion will be close to thrice the reciprocal of the average maturity. But even in markets with unusual debt profiles, this gives a far better assessment of refinancing risk.

Those wanting a measure like average maturity should actually use Macaulay-Weil convexity divided by Macaulay-Weil duration, of which a technical explanation can be found at
www.jdawiseman.com/papers/finmkts/plotting_yields.html

Shushan wrote:
Dec 7th 2010 4:02 GMT

ECB have euro print press-can u imagine what will happen afterward if they decide to print all the euro needed for bail outs and debt?

Charel wrote:
Dec 7th 2010 9:29 GMT

The Economist and the Anglo/American Media have been on a mission to denigrate the Euro and the EU. Maybe it is spite or envy. It certainly is meant to divert attention to the dire straights of the US dollar and the pound sterling.

They are half succeeding. Forgotten are the days when the dollar bought € 1.30 and sterling was worth more than the measly €1.18 it now fetches. Panic stations when the Euro drops to below $1.30. Drop the ratings of the so called PIGS. Take no notice of the US and British deficits and debt levels. Stoke up the flames to enable the hedge funds to rake in the profits.

At all times give your useless advice to the finance ministers and central banks. Never explain the cost of opting out of the Euro and the EU. Now, that would be an eye opener when Germany calculated that failure of the Euro would cost them at least 10% of their GDP, not counting the cost to the rest of the Union. That seems to be what the Economist has in store for us.

Dec 7th 2010 10:34 GMT

It is unbelievable to see how good the Dutch are doing, and what's more amazing is that the Dutch don't even realize this. Why do I find these results in an English newspaper? Hmm. Next thing the Dutch should do is integrate into GrossDeutschland ;).

Nirvana-bound wrote:
Dec 8th 2010 4:51 GMT

Europe as a whole, mirrors a dysfunctional home, on the verge of bankruptcy, with a bunch of spoilt-rotten children (citizens) who have taken control & keep on shrilly demanding their parents (governments) to buy them everything that catches their fancy, even though their exorbitant & mounting debts & bills (budget deficits) are way beyond their means already & all their credit cards (sovereign debts) are long since maxed out.

And yet the spineless & patheticly effete parents, continue on their spending spree, to keep their mollycoddled, demanding & narcissistic kids happy.

Way to go, Europe!!

Nirvana-bound wrote:
Dec 8th 2010 4:53 GMT

PS: Ditto the drowning USofA too!

TheGrimReaper wrote:
Jan 14th 2011 6:37 GMT

The euro-zone woes are have worsened in 2010 because of a lack of regulatory authority and also because the zone is now a motley clutch of countries with different economic prospects. If the zone is to be sustained and the euro currency kept afloat, the need of solidarity, mutual aid and brotherhood is vital. The stability fund was a grand stride to provide the euro-zone with a body capable of bailing-out the peripheric countries like Portugal or even Spain. The Portugal is seemingly a likely future-bailed-out economy, but we can ask whether salvaging a much bigger country like Spain will be sustainable for the already-weakened zone ? I hope that 2011 won't be the dismal year of a break-up, though every member could draw many advantages brought by a national currency (for example, to gain in competitiveness, the euro currency is a bothering hindrance, but with national currencies, any government can choose to depreciate it and win subsequent market shares).

CalvinBama wrote:
Jan 14th 2011 1:07 GMT

is it just my eyes, or does the size of economy map make sardinia and sicily look like Euro heavyweights? do they really have economies bigger than Denmark, the Czech Rep. or Romania?

TheGrimReaper wrote:
Jan 14th 2011 2:37 GMT

I think the euro-zone is now a doom-to-fail framework if nothing genuine is undertaken.
I don't see how the zone may survive such a deep crisis, even though solidarity is advocated. To compete with fast-growing emerging economies and economic Leviathans like China and America, the European mosaic of governments should consolidate, tighten its bonds and trigger a lurch towards federalism, which is according to me a possible but economically efficient way to rival with the outside growing competitors.

Europe is still a major political centre that is a hotbed for innovation, research, social improvements ... But its former sway is inch by inch called into question by the soaring power of Asian economies.

To play a predominant part worldwide, Europe has to stick to new principles, notably federalism, which is not achieved, given the zone heterogeneity. Otherwise, Europe will continue its downward trend and may even hasten its decline.

TheGrimReaper wrote:
Jan 14th 2011 5:08 GMT

One of the most concerning issue in the euro-zone is also the investor's drying out who prefer fund investments in emerging markets where yields are higher and growth prospects gleamer.

They're at the same time fretting about a debt-laden euro-zone, whose members sluggishly recover from a devastating crisis. Some of them still fear unsolvency and bankrupcy, and that's the reason why interest rates and bond yields have reached unprecedented heights. Last year, Greece collapsed in despair and made an urgent plea for European aid. A little reluctantly, the Irish government eventually resigned to take on a $89 bn bail-out to sustain its weak banking system, hit so sharply that it teetered on the brink of bankrupcy.

In my view, the common target of reining public deficit back to 3% of GDP is a quixotic prospect which many might endeavour to attain by 2013. In 2011, Portugal and Spain will certainly grab the full attention on their accounting and rating's agencies decisions may deter yet more investors to take big risks in those countries. The sovereign-debt crisis is far from ending up since the 2008 crisis let Europe economy battered and the first sputterings of recovery don't presage better prospect for 2011.

2011 will too be a watershed year in defining whether the reinforcement of the currency zone is necessary. I think the portentous events that shake up the zone in 2008, 2009 and 2010 may prompt its members to enhance regulatory bodies' expertise, create new funds to bail-out a purported ill member and build a firewall in order to extinguish any wild fire flaring off the weak periphery. The say periphery will be put under a wider scrutiny to control its health and prevent further risks of contagion. The hardest days are coming ahead, let's see whether the euro-zone principles are strong enough to withstand new waves of hardships ...

Der Perfesser wrote:
Jan 15th 2011 5:39 GMT

The PIIGS should first peg their currencies to the Euro, and then devalue, preferably by floating. It is the only way out.

The debt 'work-outs' are con jobs which are becoming increasingly threadbare and obvious. What is happening right now is that despite the complexity of the deals, and the sleight of hand involving the ECB, is the Germany and to a lesser extent the other north European countries are supporting the PIIGS with no way out. Can this continue? My educated estimate is No, the present prop-up cannot continue for more than another six months. The German economy cannot continue to support and sustain the present policy.

From the economic point of view there is no chance of improvement for the PIIGs until they devalue. Sooner or later the advisers will have to get through to the old men in charge that they have to pull the lever, and "peg", then devalue.

Otherwise the entire Euro must devalue by some 30 to 40 per cent. Good for Germany, but bad for the banks. Who wins? No, bankers, the debts cannot be propped up much longer.

arahant wrote:
Jan 18th 2011 1:38 GMT

to Nirvana-bound: 99% of families are dysfunctional - nothing to be ashamed of :-)

Tim Hart wrote:
Jan 31st 2011 7:06 GMT

I believe the economist meant to show that the countries in the Euro area cannot print money but used the wrong term.

The Euro is a floating currency too but the difference in the light green areas is these respective nation-states cannot print more Euro's. That is the job of the ECB. The ECB does not set the exchange rate of the euro however, that is still done by the market.

1-20 of 26

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