Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Archive for the month “September, 2012”

At the centre of it all


HQ of the EU in Brussels.

The Euro crisis ceases to go away, after protests erupted last week in Spain and Greece over tough austerity measures. This followed a relatively calm period in the storm; as Germany’s constitutional court ratified the ESM bailout fund, Holland elected pro-euro parties and Mario Draghi announced that the ECB would buy unlimited bonds from weak euro economies. But despite this the EU is continuing to do badly, with an estimated decline of 0.5% of GDP across the region and unemployment averaging at 11.3% of the population.

In the middle of all this stands Belgium, at the centre of the EU. The country shares its capital city, Brussels, with the rest of the European Union and is the location to many of Europe’s governing bodies. The country understandably supports the EU strongly, with calls for deeper integration and more centralized power. But is the country setting the right example for the other periphery economies?

Mario Draghi’s promises won’t keep the peace for long. 

This year GDP is only expected to rise by a miniscule 0.1%, hardly an improvement for a country that was expecting to be in the middle of a recovery by now. The country also boasts a budget deficit of 3.4% of GDP, not as high as the likes of Spain or Britain (6.8% and 8.4% respectively) but not quite as low as the likes of Germany (0.3%) or even Italy (2.8%). Alongside this the countries debt to GDP ratio is near 100%, a statistic more representing of the unstable southern economies than the prudent northern economies. For a country that sits in the heart of the EU, it would be expected that they would have better finances than that, especially if they are calling for fiscal decisions to be made by a more centralised EU. The interest rates on the 10-year bond yields of a country are always a good way to measure how confident the international markets are with that nation, Belgium’s are at 2.58%, roughly in between the low rates of Germany and Britain (under 2%) and the high rates of Spain and Italy (above 5%). This paints the picture of an economy that is distinctly average, not in danger of being pulled into the current crisis’s of Spain and Italy, but behind the leading economies like Germany and Poland. More importantly, the volume of exports has decreased this year, with the current account swinging from a surplus into a deficit of 0.2% of GDP. This is a bad sign for an open economy that has famously relied on trade in the recent past, with rising production costs and more of an emphasis towards the service sector helping to lower the exports of the country.

A graph at The Economist shows the forecast current account for Belgium swinging into a deficit. 

But there are mitigating circumstances and Belgium as a whole is not doing too badly. When you consider that Belgium is a country reliant on trade to the rest of Europe, then small growth is to be expected when other euro economies are implementing austerity measures. The budget deficit is also only just above the agreed limit for eurozone economies and the government is clearly implementing austerity measures itself so as not to ensure it loses control of its finances. They approved a €11.3 billion package of cuts at the end of last year, rose the retirement age of its people and have already dropped the deficit from the 3.8% level it was at in 2011. The country boasts a lot of positives as well; an excellent infrastructure, strong trade links and high skilled workers. In fact, Belgium is one of the few countries to have higher economic activity than they did back in 2008 at the height of the crisis.

This graph shows that Belgium were ranked 20th in the world for infrastructure in 2011. 

The real problem lies in the future of Belgium. As long as the eurozone crisis rattles on, Belgium cannot legitimately expect to recover from its deep recession years. Were the likes of Greece to default on their debts, Belgium would be highly susceptible to a possible domino effect as markets got spooked and banks runs started occurring in the weaker economies. The country was already downgraded last year by the much feared credit agencies and the estimated growth in the next few years does not generate much enthusiasm with just 0.8% growth next year and 1.3% the following year, notwithstanding any setbacks in the global economy. The downgrade occurred largely because of the forced bailout of Dexia (a Belgium bank), where the Belgium government had to buy their division of the bank for €4 billion and help secure 60.5% of their state guarantees, this following a previous bailout of the bank back in 2008. This was a drain on the states resources and shone a light on the countries worryingly fragile banking system, where another large bank Fortis (the 20th largest business in the world according to revenues in 2007) fell apart after the financial crisis and was sold off in parts. The weakness in the banking sector is systematic of the rest of Europe, as weak banks now have to be re-capitalised by their governments, in deep contrast to their American counter parts who had to go through strict stress tests to ensure they were strong enough to compete in the market. This could be an expensive problem for Belgium to fix and set back their recovery even more. In fact, a survey carried out by Deloitte found that the percentage of CFO’s that believed the economy would recover by the end of the year fell from 60% in March to 20% in June, while 25% believed it wouldn’t recover until after 2014.

The above table found in the Wall Street Journal shows Dexia’s exposure to the fragile economies of the EU, a worrying trend in Belgium banks. 

So while other struggling euro economies are trying to build back up lost competitiveness or pay back uncontrollable debts, Belgium is waiting for these countries to pick up and consequently for trade to begin flowing again at pre-crisis levels (as three quarters of its trade is with Europe). With its fortunes so closely tied to the rest of Europe, Belgium will hope its calls for tighter integration start to pick up momentum.

Advertisements

Is a Brixit possible?


Britain has always been the odd one out within the EU; declining to adopt the euro, going against general European opinion in “liberating” Iraq and generally having a poor reputation with the rest of Europeans. More recently David Cameron vetoed the European Fiscal Compact last year (tightening fiscal rules for countries in the EU) while Britain’s foreign secretary was excluded from a group of eleven European foreign ministers in trying to come up with a solution for the Euro crisis over the last year. Furthermore, Britain is also very hard to fit into the general pattern that has emerged in Europe, that of prudent northern nations and reckless southern nations. The likes of Germany and Holland lived within their means and are now footing the bill for the likes of Greece and Portugal that are drowning in their own debt and cut off from the international markets.

Britain would be considered one of the Northern nations geographically, but has finances more like those of Spain (another troubled country). For example, a high budget deficit to GDP ratio of 8.3% resembles Spain’s slightly lower ratio of 6.8% rather than Germany, who boast a far lower deficit to GDP ratio of 0.3%. But while Spain are facing talks of a bailout and bond yields near the levels of those that had to be bailed out (5.9% on ten year bonds), Britain are comfortably paying extremely low yields on their 10 year bonds, at 1.86% recently. Some argue this is because Britain holds the confidence of the international markets, as it still holds its AAA credit status, had a budget deficit reduction plan (albeit rather unsuccessful so far) and importantly has its own currency – allowing it to depreciate externally.

A graph showing the difference in the UK and Spain’s 10 year bond yields. 

But just because Britain’s position within the EU is hard to place, it doesn’t mean they should leave, so next we will look at the positives and negatives for staying in the EU. A big positive is that the UK is part of the world’s largest single market, with free trade within the EU boosting the UK’s exports and imports (with protectionism not allowed). For example, 51% of the UK’s exports are to the rest of the EU, accounting for around £200 billion. Another benefit is the free movement of labour within in the EU, which has seen 3.5 million jobs created that are directly or indirectly linked to the EU. This also works the other way as Britons are allowed to move freely to different countries to find work. Both these measures help in cutting the regulation for firms and individuals as well, that for too long strangled the opportunities for business between different countries in Europe. For example the 27 different currencies made trade between multiple countries much more complicated and created instability as currencies could appreciate or depreciate too readily. Lastly investment is a bonus, as the UK is a good entry into the rest of the EU market for foreign firms, with the UK receiving £28 billion in 2009 from FDI. That is not to mention the increased togetherness of Europe now, with war highly unlikely and diplomatic relations at an all time high. But eurosceptic’s will argue differently, pointing to the current-account deficit of £33 billion in the first quarter of this year (a deficit to GDP ratio of 2.1%)) and the ever increasing contributions to the euro budget that outweigh, some think, the benefits that Britain receives.

UK FDI inflows in 2010 near $50 billion. 

I would argue that being part of the EU has benefited Britain over the years, but that the real question is whether they should leave now? Britain is facing the costs of helping to bail out countries that have struggled to depreciate while being part of the euro, a currency that Britain doesn’t actually use. These bailouts have stemmed from a euro crisis, which is having a clear negative effect on Britain’s exports, investments and confidence. A full scale break-up of the EU would have dire consequences on Britain, as the nation’s banks are heavily linked with the rest of Europe and could conceivably collapse as part of a domino effect.

Showing the exposure of UK’s banks to the Eurozone. 

Even considering that the EU doesn’t implode and instead moves towards further integration, is that where Britain wants to head towards? The country is already an outsider for having a separate currency; any further integration would surely lead to the adoption of the euro. It would also mean more loss of sovereign powers, as budgets would be decided in Brussels, debts spread across the whole union and credit transferred across countries to those nations that need it most (as what happens with the USA and its states). A country already angry at the loss of sovereign powers to the European High Court would be very reluctant to transfer even more control to central Europe. Another problem of further integration is that many believe this could only happen by shrinking the union itself. If so, the dropping of some unwanted countries would reduce the markets open to Britain substantially, reducing the benefits (more trade) of the single market and making the idea of staying in the EU more unattractive.

The nation’s future with the EU is clearly in doubt, with both possible outcomes leading to a big change in the relationship the country shares with the rest of Europe. For years it has gained all the benefits of being partly integrated and now it is facing all the problems. A referendum seems unlikely in the near future, as the public’s views is tainted with all the current media storm about the euro crisis, while the government would do better than to revolve the next election on whether the country stays in the EU.

So for now Britain will remain on the sidelines, as Europe moves towards an uncertain future, but sooner or later the nation will have to make a choice.

Cameron’s turn to shuffle the cards


The British government had its first re-shuffling since the Coalition took power in 2010 and it could very well be its last before the next election. So it is interesting to see what David Cameron the prime minister feels has gone wrong over the last couple of years and what needed changing. Obviously all is not right within the government, infighting between Liberal Democrats and Conservatives has divided the coalition while hardcore Tories have criticised David Cameron for losing the Parties values. The conservatives also trail the Labour party in the current polls and needed to freshen up the parties’ image.

So what appointments were made and what do they show about the Governments change in direction. First up is the Health Secretary, where Andrew Lansley lost his job after heavy criticism from the public over NHS reforms. In truth he wasn’t moved out for the policies implemented, but rather the handling of the reforms, as messages about what was happening were confusing and vague and his presence in front of the camera was sorely lacking, hurting the public image of the government. In his place comes in the previous culture secretary, Jeremy Hunt. This appointment backs up the previous statement that the government are looking to change the image of the NHS reforms, as Mr Hunt is well versed in both changing people’s minds and remaining very likeable at the same time. This is despite his links with the Murdoch family, an incident he has done well to shake off and move away from.

Jeremy Hunt will be expected to re-package the NHS reforms.

Next up is the removal of Justine Greening as Transport Secretary and her replacement Patrick McLoughlin. This is a clear shift in the policies involving a third runway at Heathrow, with the previous appointment in line with the Tories old stance against expanding Heathrow (more disruption for those living around the airport). In contrast, the new Transport secretary favours a shift in aviation policy as a third runway could possibly boost growth for the country and bring in new investment into London. This change in policy is confusing for the public, as is David Cameron’s continued denial of a u-turn on a third runway whilst clearly manoeuvring out obstacles in his way.

Justine Greening’s objections to a third runway result in her losing her job as Transport Secretary. 

Another key change was the removal of Ken Clarke as Justice Secretary, who was pro-European and leans to the left in nature (showing a move towards the right wing in this reshuffle). Criticised by Tory backbenchers for giving in too easily to the Liberal Democrats wishes, the new Justice Secretary is a clear change in direction. Chris Grayling is less easy to sway on policies and is keen to stand up against European human rights laws that have long conflicted with British law and angered everyday Britons, though it remains to be seen how exactly he will achieve this.

The loss of Ken Clarke shows a move away from the EU and the Liberal Democrats. 

These were the three big moves by the government, but smaller changes also show a new direction by David Cameron. Along with the Transport ministry, pro-growth liberals were moved into the environment and local government ministries to help promote new infrastructure projects that could help get the economy moving. Though one area where this wasn’t achieved was in the movement of Duncan Smith from the work and pensions secretary. He refused an offer to become leader of the Commons and will continue to fight against current Chancellor of the Exchequer George Osborne on cuts to the Benefits system, as Mr Osborne looks to make cuts of £10 billion by 2016.

Duncan smith’s refusal to leave is one obstacle David Cameron couldn’t avoid.

Along with individual changes there were broader changes in the government. The reshuffle showed the ever increasing cracks that are appearing between the Conservatives and the Liberal Democrats. David Cameron has tactically moved out allies of the Lib Dem’s (for example Ken Clarke) and has brought in more right-winged Tories to help boost the parties’ image rather than the coalitions (with two pro-reform Tories moved in alongside Vince Cable to help ensure he keeps on track with Conservative party aims). Nick Clegg disagreed with appointments like Jeremy Hunt to Health Secretary, but gave into a lot of Tory demands so that he could get David Laws into the government, even resulting in the sacking of Nick Harvey from the defence department, who was considered to be doing a good job and came as a complete surprise. The Conservatives also seem to be focusing on growth rather than the environment with plans for new roads and a third runway at Heathrow, which clearly conflicts directly with the Liberal Democrats aims as a green party. Watch this space.

Nick Harvey (above) is sacrificed to help get David Laws into Government. 

Furthermore, the reshuffle also shows a decline in the women and ethnic minorities in the cabinet. David Cameron had promised that at least a third of his cabinet would be female by 2015; now less than 20% of the cabinet is female with the number of women in the cabinet actually declining slightly. Welsh Secretary Cheryl Gillan, Environment Secretary Caroline Spelman and Conservative Chairman Baroness Warsi all left their posts in the reshuffle (with only Baroness Warsi moved to a lesser role and the other two fired completely), while Theresa Villiers promotion to Secretary of State for Northern Island coincides with her move out of the Transport department as she is known to be against a third runway at Heathrow. Men outnumber women in the cabinet 5 to 1, in stark contrast to countries such as Switzerland and France where women are represented far more evenly. Ethnic Minorities are even less represented with Baroness Warsi’s demotion to a minister (who can attend but not vote at the cabinet) a backwards step in the modernisation of the government as she was the only non-white member. It has to be said that at junior level more women and ethnic minorities are being brought into the government, but at the top level there seems a glass ceiling that neither group can break through right now. Other social issues with the reshuffle include the inclusion of Mr Grayling and Mr Paterson into the cabinet (both openly against gay marriage) and the number of southern ministers increased while the number of northern ministers was kept the same (despite the midlands being regarded as northern).

The Cabinet remains on overwhelmingly male and white.  

Overall the reshuffle shows a movement in David Cameron aims regarding the economy (infrastructure growth), the environment (sidelined) and the repackaging of current reforms (NHS). It also enhances the current problems associated with the coalition government, namely that it is too white, too male and too southern.

No tenemos dinero… Beneath the glamour Spanish football is going broke | Just Football


No tenemos dinero… Beneath the glamour Spanish football is going broke | Just Football.

New article up on Just Football by me, on Spanish Football and the economic problems the country is experiencing. Click on the link to have a read 🙂

No longer the king of the playground?


South Africa is the largest economy in Africa; in fact it is bigger than Angola, Ethiopia, Ghana and Kenya combined. From 2000 up to the financial crisis, the country had averaged growth of around 5% each year and last year was included into the much hyped BRIC club (Brazil, Russia, India, China), becoming the “S” at the end of the acronym. The country boasts the best infrastructure in the continent, the biggest stock exchange and still gets the most FDI projects.

But this only covers up the signs that the crown is slipping from South Africa’s head. GDP Growth since the financial crisis has barely averaged 3%, with the 2012 growth forecast cut from 3.8% to 2.8% in July. There are many reasons for this decline in growth, one being the increased competition from its neighbours. Whereas South Africa used to account for half of Sub-Saharan Africa’s GDP, it now barely makes up a third and faces big opposition from Nigeria (who have averaged 7% growth for the last decade) and Egypt (whose GDP nearly rivals South Africa’s in purchasing-power parity). While a more peaceful Africa has seen smaller countries like Kenya and Botswana attract more foreign investment directly, without the need to go through South Africa as in the past.

In Purchasing-Power Parity terms, Egypt is not far behind South Africa, found at http://www.economist.com/node/21556300

Another reason for slow growth has been a decline in its biggest industry, mining. The mining industry accounts both directly and indirectly for about 18% of GDP in South Africa, while the country possesses the World’s largest amount of mineral resources. This was great when Commodity prices were booming, but a sudden decline in prices over the last year has seen the economy affected. Additionally, Global demand has softened, with the Euro crisis in particular affecting South Africa as they account for 22% of the country’s exports. Mining quality has declined over the last few years as well, with the country falling from 37th to 54th in a “mining investment attractiveness” survey. The recent fiasco over mining strikes has also shown the poor conditions for workers in the mines and leads us onto the next problem: inequality.

The Fraser Institute’s mining investment attractiveness table, showing South Africa’s lowly position.

South Africa is rife with inequality; nearly half the population lives under the poverty line (60% for Black South Africans), White South Africans earn on average eight times more than Black South Africans (despite only accounting for 9% of the population) and since 1994 the company director’s salaries have risen by 29% compared to just 6% for workers wages. The Gini Coefficient – a measure of inequality where 0 = total equality and 1 = total inequality – was 0.63 for South Africa, an increase from 0.59 two decades ago, while the gap between the rich and poor is one of the biggest in the world, larger than known offenders such as Honduras.

The world map showing each countries GINI Coefficient, with South Africa a dark red (>.60)

The poor growth rate has substantial impacts on the whole economy, with high annual growth of 7% predicted to be needed to improve the severe unemployment figures. In South Africa nearly a quarter of the population is out of work and the high growth of pre-2007 years did not create the jobs that were hoped (rather lining the pockets of the already rich). The current president swept into power in 2009 on the promise of economic reform and job creation, but his target of getting unemployment as low as 14% by 2020 looks unattainable and since his party took over, 2 million jobs have been lost and unemployment hasn’t dropped below 22% since 2002.

The South African Unemployment figures from 2000-2010, found at http://southafricaeconomywatch.blogspot.co.uk/2011_01_01_archive.html

That’s not the only problems the country faces either. One of the biggest problems is the poor education South Africans receive, where educational spending outstrips most other African countries per child but remains one of the worst educational systems in the continent. This creates the problem of an unskilled labour force (especially in IT skills) that is unqualified for the jobs on offer in the country (resulting in foreigners being brought in for the top jobs). Another problem is a lack of credit since the financial crisis, with the ratio of bank credit to GDP falling by 10% (see the Economist’s graph below). Bad economic indicators also show an economy in trouble; with the current account deficit at 5.5% of GDP (showing the weakening of exports due to the Euro slump and strong domestic currency) and the budget deficit at 5.6% of GDP (due to poor exports lowering income for the country) thought the debt to GDP ratio of the country is a lowly 33%.

Graph showing South Africa’s drastic drop in Bank credit to GDP ratio, found at http://www.economist.com/node/21559336

So is South Africa losing its crown?

At the moment the nation is still the biggest kid in the playground and remains far ahead of other countries in sophistication and diversity. Despite the country having the largest mineral reserves, the economy is not revolved around the mining industry; with clear signs of variety in different sectors like industrial production and some good headway in improving the service sector. But South Africa will find it hard to throw its weight around when all the other kids start experiencing growth spurts.

Post Navigation