Europe’s winners and Losers
The Euro Crisis has created a doomsday atmosphere around the continent, with the threat of the “Grexit” hanging over many heads. So I have decided to create a list of those countries that I believe are doing well economically right now and those countries that are suffering the most from these destabilising times.
Germany is currently one of the strongest countries in Europe. Germany experienced growth in the first quarter this year of 0.5%, helping to keep the eurozone out of recession, while low inflation (1.9%) and unemployment (6.7%) are the envy of the continent. They are known as Europe’s equivalent of China because of their high current account surplus, exporting more goods than they import (producing over a quarter of European output), though a slump in European demand has damaged their exporting machine somewhat. In fact, the one major factor stopping Germany from growing more is the rest of the struggling economies in the EU, with the southern states like Greece requiring expensive bailouts to keep their economy running. But then Germany benefited hugely during the boom years, when these same countries were borrowing money off Germany to buy German goods. This northern and southern split can be seen in the bond prices for Germany and Spain, where the difference between the two is the biggest it has ever been. Germany’s 10 year bond yields have dropped to 1.34%, while Spanish 10 year bond prices have risen to 6.55%, a staggering difference that shows the confidence markets have in Germany’s ability to pay its debts. Germany does face some problems like Greece’s potential exit from the EU (with Germany one of the nation’s most exposed to a Greek default) and the possible domino effect that could result, while cries for “Eurobonds” and Germany to accept higher inflation won’t sit well with Angela Merkel but might be the best way forward. As the leaders of Europe they make it onto my list, but they will have to shoulder more responsibility if they are to ensure future growth.
Showing the Difference in the German and Spanish 10 year bond yields.
Poland is the next country on my winners list, as they are one of the fastest growing countries in Europe. They have benefitted hugely from being neighbours to Germany, where German demand helps boost Polish output. While the hosting of Euro 2012 this month has focused government concentration on improving the infrastructure of the country, for too long a drag on Poland’s development into a modern economy. The country is currently the sixth largest economy in the EU, was the only country not to fall into recession during 2009 and it predicted to grow by 3% in 2012. Poland still has its own currency as well, meaning the current problems other EU states are facing now of trying to devalue their economy through internal cuts has been avoided by Poland, who externally de-valued when needed to remain competitive (allowing the currency to devalue etc). The country also has impressive internal demand which has helped buffer the external factors currently plaguing other EU nations and its banking sector is a lot more secure than its neighbours. But the country can’t completely ignore the outside world and while growth is strong, it is slowing down. More tightening of its interest rates could help reduce persistently high inflation, while more improvement of its infrastructure could attract more external investment, which has slowed down in recent times.
The hosting of Euro 2012 could help boost Poland’s infrastructure.
Sweden is the last addition to my list. This is because Sweden is a country that ticks most of the boxes for success right now; the third highest GDP per person in Europe, an unemployment rate of 7.7% (one of the lowest in Europe), a public debt to GDP ratio under 40% (extremely rare in Europe) and is one of the few countries expected to grow this year. This builds on a good year last year, where they were only one of three countries to have a budget surplus and had growth of 3.9%. They have achieved these accomplishments through being a successful manufacturing exporter, not having the euro currency (allowing them to externally de-value and avoid harsh spending cuts) and by being fiscally responsible which has left them in a much better position than their neighbours. They still have some hurdles to jump however, with their youth unemployment surprisingly higher than the UK’s (a nation it beats in most other departments) there is need for some reforms to help the transition from education to employment. While Sweden’s forecasted GDP growth this year is a lowly 0.3% that shows a slowdown in their economy from last year and the need for a timely boost.
This graph shows Sweden are one of only 6 countries to have a debt to GDP ratio of under 40%. This can be found at http://www.social-europe.eu/2012/05/francois-hollande-is-right-why-fiscal-stimulus-would-reduce-debt/
Greece tops my loser list with its economy crashing before everyone’s eyes. Greece’s unemployment reached a new record last month at 21.7% meaning nearly 1.1 million Greeks were out of work, while youth unemployment has reached an incredible 54% meaning over half of young people are not employed. The Greeks debt is the biggest problem however, at €356 billion and set to peak this year at 172% of GDP – an uncontrollable size – and even in 5 years time it is still predicted to stand at 137% of GDP. Their economy declined by 6.9% last year, is set to decline again this year by 4.7% and if so will mark the fifth successive year of decline. The country have had to agree to two bailouts from the rest of Europe and the IMF just to keep the economy running with the consequences being harsh austerity measures being placed on the Greek public. Recently this boiled over in the parliamentary elections, as the public voted for anti-austerity parties and the end result was that no governmental majority could be formed. If there is one plus right now for Greece it is that they are at least cutting away their budget deficit, with the deficit lower in the last two months than what was predicted in the initial budget. There is talk of Greece exiting the euro, which would have a extremely negative effect on both countries initially, but could actually be a better long term solution as it would allow Greece to de-value its country externally with a weak currency that could boost exports, while also losing the EU a flagging member, though if a domino effect on other weak economy’s was to happen then it could mark the end of the euro.
Portugal is next up on the list with a weak economy that would be vulnerable to any Greek default. Portugal also had to be bailed out last year to help its struggling economy and is in a similar situation to Greece, if not as severe. They have a public debt to GDP ratio that is set to peak at 115%, an unemployment rate of 15%, a youth unemployment rate of over 35% and a decline in their economy last year of 1.6%. They are predicted to decline further this year by 3% and are highly susceptible to any market shocks. Portugal’s problem is that they are uncompetitive in today’s market and are struggling to turn this issue around whilst still in the euro. They had a current account deficit last year of 6% and do not export enough goods to justify their standard of living. Portugal are working well at reducing their high budget deficit of recent years but still have a tough journey to regain their competitiveness, this is why they make it onto my losers list.
Portugal’s current account deficit over the last few years, showing how they have become noncompetitive and too reliant on imports.
Spain completes the list with one of the most fragile economies around right now. They are different to the likes of Greece and Portugal in that they didn’t overspend before the recession and actually have relatively low public debt (less than Germany currently). Spain’s major problem was instead that their industry relied on a construction boom, which turned into a bubble and promptly burst when the financial crisis hit. This caused a big rise in unemployment, as construction firms were a key employer in Spain, with the unemployment rate at 23.8% and the youth unemployment rate over 50% (the highest rates in Europe). The other industry Spain relied on was the banking sector which has declined across Europe and left many of Spain’s banks undercapitalised and unready for external market pressures. Spain are now trying to tackle a high budget deficit (8.9% of GDP last year) with big internal cuts (with external devaluation impossible) but are facing problems trying to get local governments to undertake such cuts while also trying to improve growth with the country forecasted to decline this year by 1.8%. Spain also remain extremely vulnerable to a Greece default, with their high bond prices (already mentioned earlier) showing a lack of confidence from the markets in Spain’s ability to pay their debts. If Greece were to fall it would be damaging but fixable for the EU, Spain on the other hand would cause irreversible damage and undoubtedly bring an end to the euro. Europe will need to help Spain remain steady after the recent destabilizing pressure around the country, Spain will have to reform their economy to help improve their poor employment record and competitiveness.
Showing the rise in Spanish unemployment since the financial crisis hit and burst the construction bubble.