Monday, 14 January 2013

Alexonomic's Outlook For 2013: Europe

Europe reminds many historians of conditions during the 1930s. 

Economically depressed countries are embracing extremist political parties with racial divide, riots, and anger as the symptoms.  Currently, most of the population is aware of the European debt crisis. Although a serious as the economic crisis is, the side effects of lower economic output can be more serious.

Economically, Europe has seen better days. Germany is leading the policymaking of the union, but it is debatable whether German decision making has been good or not. For example, the Germans increased their exports with the European Union, as countries such as Greece all of a sudden gained momentous borrowing power with the new strengthened currency, and bought Germanic and other goods with the new found buying power. The problem with Greece is it never practised any sort of financial constraint, something that should have been expected with Greece’s sordid past. It’s not only Greece, but Spain, Italy, Portugal have seen financial decay which has spread the contagion across the EU. To go over some statistics, Spain recently dealt with one of the worst droughts in 70 years while government debt in Spain rose by 11% in 2012. Housing prices fell by 11.2% while the youth unemployment of the Spain is above 50% and unemployment rate is nearing 25%. It is estimated the amount of toxic loans in Spain account for 13% of total Spanish GDP.

 Portugal has a youth unemployment rate of 35% along with an unemployment rate of 15%, while if one adds all debt in the country (government, business, and consumer) it accounts for 360% of GDP. Italy has youth unemployment of around 32%, while the Italian debt market has been one of the largest in the world. Should Italian bond interest rates even rise by 1 percentage point, this could have devastating consequences on the country. The debt to GDP ratio in Italy is 120%.

Returning to Greece, 50% of Greek youth are unemployed while HIV/Aids and malaria is making a comeback in the country, while the debt to GDP ratio is around 160%. The European Central Bank (ECB) currently is leveraged around 36 to 1; comparatively Lehman Brothers was at 32:1 when it collapsed. Most of the debt on the ECB’s balance sheet is PIIGS, or Portugal, Ireland, Italy, Greece and Spain. Continual compromising by Europe on Greece, which had cut an additional 40 billion euros of Greek debt and giving the Greeks another 44 billion. This is on top of the $140 billion provided in May 2010 by the IMF and EU, and an additional $170 billion that was given in 2012. Technically, Greece has been in recession for 4 years, and its economy is predicted to shrink again by 4.5% in 2013.

European ministers are demanding austerity cuts, which continues with increases in taxes. This is a continuation of cuts in salaries of public workers, along with budget cuts that has seen Greece stumble over the years. Greece is not alone. However, the economic decline of Greece is having a far greater political effect. Golden Dawn’s members wear black shirts and stand for neo-Nazism, are anti-immigration (and immigrants), and are growing in popularity – which can be seen by the acquisition of parliamentary seats.

The phenomena are not stand alone. As Catalonia voted for austerity, lesser reported incidents such as a Spanish mayor stealing from the rich to give to the poor, a recent attack on the Greek PM, or Italy’s fascination with Berlusconi are quite problematic in actually progressing economically. Radical political formulations, anarchy, nationalism and violence seem to be the side effects of the 11% unemployment rate of the European Union.

France always seems to have some form of riot going on, this time over same sex marriage introduced by socialist President Hollande. However, France will have larger issues if Greek defaults, as they are by far the most exposed to Greek debt. Hollande’s ridiculous solution to tax the rich at 75% was thankfully struck down by the French Supreme Court as unconstitutional. French economic woes continue to exist as the unemployment rate is at a 14 year high, and Europe’s second largest economy grew only at 0.1% this year. With very pro-labour laws and powerful unions, the French cannot compete on a global scale as labour and production costs are simply too high.  A thirty-five hour work week, ridiculously high job security, benefit and vacation packages all prevent corporations from wishing to hire. Innovation does not occur in France, only street demonstrations once these privileges are threatened.
One of this generations's greatest political strategists
 will continue to have stress in 2013 

Once Germany’s equal, France seems to have fallen to the whims of the Lady, or Angela Merkel. Germany has been affected by the economic crises, and the Germanic notion of assisting their European counterparts out is losing popularity quickly in Germany. As the parliamentary election descends upon Germany in September, politicians will be reluctant to be pro bailout of EU, and more advocating on a bailout from the EU. Already in 2012, the Chancellor’s majority voted against Merkel, or the coalition of the Christian Social Union, Christian Democrats and Social Democrats. The challenge for parties will be to stay united in Germanic hegemony of the Euro, or a potential collapse could occur. Most likely, markets will be shaky during the last three months of the German elections.

However, Ms. Merkel has proven to be quite the political strategist. Her strong popularity ratings are strong as a result of her weariness to put German taxpayer money at continual risk by supporting countries such as Greece. In 2013, Ms. Merkel will faced increased opposition to her call for austerity, as President Hollande of France will not be siding with her any more  Although the German economy has been relatively strong throughout the crisis, unemployment is rising. Most likely, the Merkel led Christian Democrats will win the most parliamentary seats.
Sometimes the most productive marriages are not
about love,  but convenience

While the EU has been largely led by Merkel, Britain has flirted with the idea of increased isolation from Europe, as the benefit would be the ignorance of Europe’s problems. While the Conservative – Liberal Democrat union has seen ugly battles over House of Lord’s reform, 2013 could be the year the loveless marriage is strongly tested. As anti-European sentiment grows, both parties will be tempted to present increasingly negative policies toward their neighbours. The Economist states that as the European Banking union approaches, Britain could be “presented with two terrible options: lose the ability to write the rules that bind the City of London, or lose access to the European market for some financial services”. MP’s will demand a renegotiation of Britannic influence in Europe, which will cause political infighting.  

However, Britain serves as a good example to the world, especially the United States, in terms of political resolve to solve. State finances are gradually coming into control, the economy is getting better piece by piece, and welfare and education have both seen positive transformations. Overall, the loveless marriage between the Conservatives and Liberal Democrats led by David Cameron and Nick Clegg has produced solid results that are relatively politically unparalleled in the West.

One major issue that has not been spoken of in the West is increasing invasions of privacy. The European Union voted against ACTA which European MP David Martin stated would be too open to misinterpretation. I will always support civil liberties over intellectual property rights protection in the EU." Mr. Martin is correct, although the constant monitoring of civilians and continual argument over privacy laws will be somewhat of a continual theme not just in 2013, but throughout the decade. A million cameras in London, or the arrest of a person who wrote an insulting twitter post, are both stories that are scary, but seem to be overrun by other stories fairly quickly. This will begin to change in 2013, as many Europeans led the charge to disband ACTA.
  • Europe will continue to pursue fiscal solutions to their many problems, so the theme for Europe of 2013 will be a continuation of the problems that have faced Europe since 2008.
  • France will face the demise of their power in the Union, while there is a chance Angela Merkel could consolidate power and become the European President in title.
  • The continual economic problems will plague Europe as the lending power of the ECB has significantly decreased due to their already heavy burden. With bailouts being an unlikely solution due to less lending tools, Keynesian economics may be abandoned in favour of austerity.
  • It is predicted that countries such as Belgium and the Netherlands will have flat growth, while the PIIGS will continue to decline in Europe. This most likely will mean the continue fight against anarchy and nationalist feelings causing violence, such as those promoted by political parties such as Golden Dawn..
  • Britain will face increasing negative sentiment towards the European Union, and threat of continual separation will arise.

Overall, Europe will again face a difficult 2013 with September being especially interesting due to the massive clout Germany has over the financial future of the union. Due to high regulation, high amounts of debt, high political unrest and uncertainty, Europe will remain in 2013 a risky place to conduct business with little chance of much reward. 


Martin said...

Thanks for sharing such a nice information wih us. Please keep on posting so that I can keep myself updated.

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