Economic Interests

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Archive for the tag “Germany”

Is the EU being dragged apart?


After a sense of calm had finally emerged in the eurozone since last summer, panic has erupted once again. Cyprus’s long awaited bailout was carried out with little thought of the consequences, both short term and long. The initial decision to place a one off tax on all depositors in Cypriot banks, both over and under €100,000, was always going to lead to public uproar and a bank run. The second bailout decision was slightly better, only affecting those with over €100,000 in their banks accounts and winding down one of Cyprus’s biggest banks, the Laiki bank, while switching accounts to the Bank of Cyprus. But the damage had already been done; the government now has to enforce capital controls to keep money in the country, while the public won’t forget how close it came to them losing chunks of their bank balance. It has almost certainly ruined one of Cyprus’s biggest sources of income as an offshore financial haven, with the conditions of the bailout most likely requiring reforms of the country’s economy. Then there is the tourism sector (another big market) which will be hit, as foreigners won’t want to risk getting caught in the middle of another financial crisis. Worst of all, this will not be the end of it; the economy is set to retract by 5% in the more positive estimates and another bailout will need to be negotiated.

Cyprus’s  Debt-to-GDP ratio could overtake Greece in the future by some estimates. Found at http://trueeconomics.blogspot.co.uk/2013/03/2432013-are-cypriot-debt-dynamics-worse.html

Yet this is not the biggest worry for the European Union. Cyprus accounts for a tiny 0.2% of Eurozone GDP, its bailout at €10 billion is minuscule compared to the €246 billion needed to bailout Greece. If the economy crashed and defaulted on its debt, it would hardly tear the European Union apart. The bigger repercussions of this debacle are that the EU looks as divided as ever. The capital controls being placed on the Cypriot economy are not supposed to be possible in the EU – they are the first case of it since its creation. They are supposed to be short term, but then the same was said about Iceland 4 years ago.

 Cyprus’s Bailout is tiny compared to the other EU Bailouts. Found at http://www.economist.com/blogs/graphicdetail/2013/03/daily-chart-18

Even more worrying is that the much heralded banking union that the EU nations announced last year now seems less likely. The European Central Bank was set to bail out troubled banks directly, thereby cutting off the self-defeating link between weak banks and weak governments. But to some member countries that seemed too much like gifting money without conditions that have so far been ever present within bailouts e.g. reforms to the economy. Cyprus was the big test, to see if the ECB would directly fund the failing banks of the island, but disappointingly this was not to be the case. A banking union would have showed a more unified EU, with member countries prepared to provide assistance to troubled states. It could have possibly paved the way for joint government bonds, stopping the inconsistent borrowing costs that have spread throughout the eurozone. In reality the EU members have been diverging for awhile, amplifying the problems of the union.

Looking across the region, this isn’t the only sign of a gap emerging between EU states. Tensions are rising within the union, with the periphery nations growing resentful over the austerity policies being enforced onto their economies, while the central nations are becoming frustrated at having to rescue the weaker nations from their own mistakes. This is showing in the form of protest votes. Greece had a near miss in their latest election, where a party campaigning on leaving the euro ran the victors close. Italy went a step further, with the 5 Star Movement (a protest party lead by an ex-comedian) caused a political gridlock in the March elections which has yet to be resolved. This was helped by the far right being led by Silvio Berlusconi, a controversial billionaire who campaigned on ending the EU austerity in Italy. In Germany, Angela Merkel will soon face her own elections, where her popularity will be tested by opponents who will campaign against the continued funding of the EU by the German tax payers.

Beppe Grillo has captured votes for his 5 star movement party by campaigning for a referendum on EU membership. 

Then there is France, a country somehow caught in the middle. The nation is central to the EU, its partnership with Germany gives the union its clout and its leadership with Angela Merkel helped lead Europe through the financial crisis in 2008/2009. But Francois Hollande won his presidency by promising policies like the 75% tax on millionaires and the lowering of the retirement age, while he has backed the periphery economies in talks against austerity (to the annoyance of Angela Merkel). The French economy is in desperate need of reform and cuts however. The budget deficit is set to go over the set target of 3% of GDP, public spending is the highest in the EU at 57% of GDP and while Germany’s economy has become more competitive over the last decade, France’s has been left unproductive in the global economy. President Hollande is now set to implement the austerity measures he never mentioned during his campaign and has since seen his popularity plunge to the lowest since the firth republic began.

Showing the high public expenditure of France compared with similar sized countries. 

The contradictory aims of the different members are leaving the big decisions unmade. The lessons of the past bailouts are not being learnt; there is still no definite lender of the last resort, no banking union, no talks of the possibility of sharing out some of the debt across the union to help member states recover. Austerity is needed, but so are some pro-growth policies and just demanding more and more cuts from the bailed out countries is not going to get the right results. The EU budget could be restructured to help improve spending on much needed areas like infrastructure and reduce spending on subsidies like French Farming and the rebates that go to countries like Britain.

Britain is another obstacle awaiting the EU in the future. The government is set to hold a referendum after 2015 (if it wins) on its EU membership and if the union is still facing the problems it is today, it is not inconceivable that the nation could leave the club. The public are already frustrated at the European laws they have to abide by and the levels of immigration that arrive to their shores. Losing Britain would be a deep blow to the union, both as the third largest economy and as a good balance to Germany’s motives. But the growing popularity of the UKIP party, again campaigning on an exit from the EU, shows the split that is appearing between member states.

Together the EU is the biggest economic zone in the world, one which can rival the economies of the USA and China. Divided it is a bunch of quarrelling nations that can’t agree on the best policies to move forward. Right now the latter is a more poignant picture of the EU, with GDP retracting by 0.3% in 2012  and unemployment reaching a new high of 12%. Europe needs to integrate further both politically and economically if it’s reverse this slump. A move towards a banking union would be a good start, while sharing the debt burden of its weakest members would go a long way to restoring stability to an economic zone that has struggled with such a concept.

A divided Europe is a weaker Europe, let’s just hope it doesn’t take its members too long to remember this.

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Does money buy success? « Back Page Football


Does money buy success? « Back Page Football.

 

Article I wrote on whether money has bought success in the 5 big European leagues this past season. Have a read, its very interesting 🙂

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.

Winners:

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/

Losers:

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. 

Why does the Spanish Stock Exchange Shrink? By Adrian Espallargas


Spain entered in recession last month for the second time in three years. This country has been economically struggling since the 2008 financial crisis. The harsh austerity policies passed by the conservative government have not tackled the two main economy troubles of the country: The high unemployment rate and the very damaged financial sector. Therefore analysts are not very optimistic about the future of the Spain´s economy. In fact, the IMF expects the Spanish economy to shrink by 1.7% during this year.

Consequently, the Madrid Stock Exchange has continuously fallen since July 2011. Have a look at this graph.

However, some European countries economies have grown in the last two years or have recovered somehow after the 2008 financial crisis. For example Germany.

But why does the German economy increase while the Spanish hits the bottom? Let’s have a look at the companies that make up the DAX 30 and the IBEX 35 indexes in Frankfurt and Madrid Stock Exchanges respectively.

   

This is Germany

Among the 30 most important companies in Germany there are:

  • 10 Chemical, Technological, Medical or Pharmaceutical firms.
  • 4 Automotive Companies.
  • 2 Banks.
  • 2 Insurance Companies.
  • 2 Personal and Home Care manufactures.
  • 1 Steel Company.
  • 1 Cement Producer.

This is Spain

Among the 35 major Spanish companies there are:

  • Banks.
  • Construction and infrastructure corporations.
  • Steel companies.
  • Pharmaceutical.
  • petrochemical.
  • Solar Power company.
  • Wind Power company.

Germany has a large number of firms that manufacture diverse products. Automotive, Chemical, Technological, Medical, and Pharmaceutical industries are big job creators. Those businesses need from very low-skilled level workers to very-highly educated employees. In other words, from assemblers and transporters to scientist. Besides, the large scientific community in Germany assures the country  has very innovative top level firms.

The two main activities by the 35 major companies in Spain are banking services and construction. Precisely, the two industries most affected by the 2008 economic bubble.

Construction suddenly stopped after the bubble. This industry propelled Spain’s economic growth in the 2000s making around 10% of the GDP and employing 9% of the labor force in 2009. Construction is also a huge job creator that pushes other industries such as steel manufacturers. But Spain has over built infrastructures, buildings, and houses. In fact, Spain built more houses than Germany, Italy, and France together during the bubble. There is nothing else to be constructed. Therefore, one of the largest industries has halted its economic activity triggering massive layoffs. Now, unemployment is at pre-housing bubble levels (1994-1996). The jobless rate had decreased but once the bubble exploded, we see that Spaniards are at the same situation as when it started.

Found at http://globaleconomydoesmatter.blogspot.co.uk/2010_07_01_archive.html

On the other hand, Spain has a crippled financial sector. Banks have accumulated numerous toxic assets from unpaid mortgages. Instead of depreciating the value of those properties to the current market prices, Spanish banks keep reporting in their balance sheets that the value of those assets is the price paid before the economic crisis in order to avoid reporting loses. But those prices are not fixed to the current. Consequently, nobody will invest in real estate keeping those toxic assets in stock having banks full of properties but short of liquidity.

Therefore, banks are not lending money. Despite the fact that the Spanish government bailed-out many of the cajas (savings banks), banks have used that money to pay the debts they had with other institutions instead of injecting money into the economy. Thus, there is no credit for individuals or companies. There is no fuel to start the engine.

Therefore, having the two main industries severely damaged has left the economy stagnant. Unlike Germany, there are no other industries that can carry the economy into a better scenario. The main problem of Spain is Spain itself. Until this country invests in different industries, unemployment will be an endemic disease in this nation.

This was written by the talented Adrian Espallargas, who has a great blog http://www.storyofacrisis.com/ and can be found on twitter @storyofacrisis


Is Germany the new role model for Europe?


In the current chaos of the Euro zone, Germany is almost seen as role models (along with France to a lesser degree) for the other failing countries. Their strength is in exporting goods where they are currently ranked as the second largest in the world (this puts them ahead of the USA) and is a big factor in them having the largest economy in Europe.  The Fortune Global 500 includes 37 companies located in Germany and they are one of the leading countries in developing and using eco-friendly technologies. Sounds good right?

It gives strong evidence to the idea that Germany is the future of the Euro, with countries like Greece, Portugal and Italy expected to mimic Germany’s efforts. Germany has consistently pulled the Euro forwards during the bad times, they did this in 2010 by exploiting the weak Euro and moving their exports into overdrive whilst refraining from importing themselves (effectively bringing money into the country and not letting it back out).  One aspect of their economy that other countries could learn from has been there attitude to unemployment; they changed their benefits systems at the start of the century to motivate people back into work, with benefits harshly cut if the healthy were out of work for too long. These harsh methods inevitably brought results, and Germany’s unemployment has dropped since the recession of 2007, while the USA’s for example has risen.  Another interesting factor is that Germany was never really sucked into the housing bubble; German banks required a 40% down payment which restricted the house prices from increasing too much.

But does this really paint the full picture of Germany? There are some inconvenient truths that are usually left out when talking about Germany, like for instance despite many praising there strong recovery after the recession, it is left out that they had one of the largest fiscal stimulus programmes in Europe (the government spending more money, rather than cutting debt).  The praise about low unemployment also hides the truth that many companies were asked to cut hours rather than fire employees, which kept good numbers for the public, but has probably just delayed employment problems for the future. The more damming statistic is that during 2010, Germany actually increased their budget deficit (when other countries were decreasing) and in 2011 had a very low decrease. But that’s not all; Germany’s debt to GDP ratio is 80% which is not role model material at all, with countries like Finland, Denmark and even Spain showing better ratios.

We can also look at the primary balance; this is countries revenue (excluding any new borrowing) minus expenditure (government spending excluding interest on old debt). This has been used to judge countries like Greece and Portugal in current bailout schemes, but looking at Germany’s past primary balance isn’t too convincing with the period before the recession revealing a deficit. Compare this to Italy who have performed well in this regard and are set to achieve a surplus of 3.1% in 2012.

So, is Germany the role model for how Europe can get back on track? The fact is they have a strong economy that negotiated the recession well and might have even done better if they hadn’t be brought down by the Euro crisis. But they have yet to tackle their debt and seem set on increasing borrowing and spending. The hypocrisy of “do as I say not as I do” means they lose my vote, but is there a better option?

By Kane Prior

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