Edward Hugh at Euro Watch is asking From A Greek Debt Crisis To A Eurozone Structural One?

When we look back five years from now, will we see this week as marking a turning point in the short, but far from uneventful, ten year history of Europe’s common currency?

Simon Derrick, chief currency strategist at Bank of New York Mellon even went so far as to say the trauma of recent days might well signal the point that we stop talking about a “Greek debt crisis” and start talking about a “Eurozone structural crisis” .

Basically it is important to recognise that the current crisis has placed the spotlight on the severe institutional weaknesses which lie underpin the common currency, and it is just these weaknesses which are leading so many commentators to now ask themselves whether it might not have been easier to implement political union in Europe before embarking on such an ambitious monetary experiment.

These weaknesses became even more clear on Thursday when Jean Claude Trichet went very public in making clear that he personally is totally opposed to IMF participation in any Greece “rescue”.

The Economist magazine have done their own calculation on this, and they estimate that a loan of €75 billion rather than the currently rumoured €25 billion will be needed and that the country is likely to need five years (rather than three) to get its deficit down below 3% of GDP. They also assume that Greek GDP will be 5% below its current level by 2014. Obviously the output you get in these sort of calculations rather depend on the expectations you put in, but these are not unrealistic expectations.

The bottom line is that there is no easy answer here, and Europe is struggling to convince the rest of the world that it has both the will and the instruments to effectively tackle the problem of maintaining a single currency in a diverse group of countries. Herman Van Rompuy said on Friday there was no danger of Portugal being sucked into the same sort of debt whirlpool as Greece, and that Portugal would not be the next country to be sent over to Washington in search of a helping technical hand from the IMF. Which raises the question: if it won’t be Portugal, who will it be?

Spain’s Economic Woes

The Economist is discussing Spain and The Mañana Syndrome

The list of things that need repair is extensive. Spain’s structural faults were long hidden by a housing bubble and have been glaringly exposed now that it has burst. From unemployment and low productivity growth, and from troubled savings banks to creaky public finances, the problems are piling up. With the government unwilling to apply radical surgery, there are fears that Spain will fall further behind its neighbours. “The risk is that we will have a lost decade, like Portugal or Japan,” says Lorenzo Bernaldo de Quirós, an economist at Freemarket International Consulting in Madrid.

Unemployment tops most people’s worries. Faster growth is needed to bring it down. Yet Spain has been in recession for seven quarters; the government expects GDP to shrink again this year; and the IMF forecasts growth of less than 1% in 2011.

The public finances must also be fixed. Last year’s deficit ballooned to over 11% of GDP. In January Elena Salgado, the finance minister, produced an outline of austerity measures that calmed market fears about Spanish debt. But two months later the plan still lacks detail—and has an obvious flaw. An optimistic Ms Salgado predicted growth of 3% in both 2012 and 2013, bringing added revenues to cut the deficit. Spain’s European commissioner, Joaquín Almunia, has warned against the sin of over-optimism. Growth will not go over 2% until 2014, says Ángel Laborda, an economist at FUNCAS, the savings banks’ foundation. He reckons that more tax rises and spending cuts are inevitable if the government is to hit its 3% deficit target by 2013.

The Bank of Spain’s governor, Miguel Ángel Fernández Ordóñez, is calling for reform of a rigid labour market that makes most employees too costly to fire but condemns a third of workers to unstable, unprotected temporary jobs. Yet the government has repeatedly delayed pension and labour reforms. Mr Zapatero’s great goal is to conserve social peace. That means keeping trade unions happy, even if reforms (and growth) have to wait.

Some detect a whiff of cowardice. Mr Zapatero’s determination to avoid general strikes is proof that he will never take a difficult decision, says Artur Mas, head of the Catalan Convergence and Union coalition. And because broad agreements on public-spending cuts lack detail, they also lack urgency.

The delay in sorting out the cajas adds to the sense of drift. Most Spaniards do not see the economy improving any time soon. Faith in the political class is at rock bottom. The Spanish now rate politicians as a bigger problem than their old bugbear, terrorism. Mr Zapatero’s Socialists are trailing in the polls—but an election is not due for two more years.

UK Pain To Come

The British Economy has Pain To Come.

As Britain prepares to go to the polls, its sick economy is uppermost in voters’ minds. With good reason. There are fundamental doubts that it can ever recover fully from a banking crisis and recession that laid Britain lower than many other rich countries. In the short term, the worry is whether a feeble recovery reliant on fiscal and monetary life-support can develop its own driving force.

The economy shrank by 5% last year, the biggest fall since the Great Depression. The contraction over the six quarters of the recession was 6.2%. That peak-to-trough decline was less severe than in Japan, Germany and Italy, but the recession lasted longer than in any other G7 economy.

The public finances look even worse. Not only is the budget deficit the highest, as a proportion of GDP, since the second world war, but this year’s will be the biggest of any G7 (and even G20) economy, according to the IMF. The build-up in government debt between 2007 and 2014 will be second only to Japan’s (see chart 1).

Recent disappointing export performance has dimmed hopes that Britain can trade its way out of the quagmire.

As one reverse has followed another, Britain’s economic reputation has nosedived. So has sterling. Its trade-weighted value has fallen by around a quarter since mid-2007, a bigger decline even than after the pound was turfed out of the European exchange-rate mechanism in 1992. For some, Britain now vies with the distressed likes of Greece and Spain for the title of sick man of Europe.

There is also more than a passing resemblance to Japan, which never regained its economic stride after its banking crisis of the 1990s. Could Britain now follow suit, given that its financial system came so close to collapse in October 2008? Those inclined to think so find worrying confirmation in a report by McKinsey, a management consultancy, which shows that total indebtedness in the British economy was the highest as a share of GDP among ten advanced countries in 2008, narrowly beating Japan’s.

Britain’s political economy is on trial as much as its economy. The government is currently spending four pounds for every three it receives in revenues. This reflects not just the severity of the recession but misjudgments during the good years. It was a mistake to be borrowing at all, let alone over 2% of GDP, in 2006 and 2007 when the economy was strong. Moreover, that deficit would have been even higher but for inflated receipts from ebullient property markets and financial firms.

Mr Darling’s budget is the last breath of a dying government. What will really count is the first one of the next parliament. That budget will have to do what the chancellor failed to do: set out a credible plan for reducing the deficit, grounded in sober rather than wishful forecasts for growth, decide where spending cuts will actually be made, and also—in all probability—announce additional tax increases.

The country’s economic future may be less dazzling than before but that glitter turned out to be fool’s gold. After those excesses, a period of private sobriety and public austerity may prove to be no bad thing.

There is much more to see in Economist articles on Spain and the UK. Please give them a look.

Deflation Persists In Japan

Bloomberg is reporting Japan Deflation Persists as Consumer Prices Fall 1.2%

Japan’s consumer prices fell for a 12th month in February, adding pressure on the central bank to eradicate deflation that is hampering the economic recovery.

Prices excluding fresh food slid 1.2 percent from a year earlier, after dropping a 1.3 percent in each of the preceding two months, the statistics bureau said today in Tokyo.

Finance Minister Naoto Kan said the report shows more efforts are needed to overcome deflation even as price declines ease.

Because of Japan’s record public debt, “the scope for fiscal stimulus is very, very limited to non-existent, but there’s probably more scope on the monetary side,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages $667 billion. BOJ liquidity injections will support the economy and stock market even as deflation persists, he said on Bloomberg Television.

What does Japan have to show for two years of fighting deflation?

This:

With credit once again to the Economist.

Japan’s 2014 estimated 246% ratio of debt to GDP exceeds every other G7 country by a mile.

Take a look at the problems in Spain, Japan, Greece, Italy, and the UK. Even Canada does not look so hot as noted in California USA vs. Ontario Canada – Which State (Province) Is In Worse Shape?

Moreover, Canada, Australia, the UK, and China all have huge property bubbles that have yet to pop, but they will.

The US is certainly not alone in fiscal problems. Indeed, global imbalances mount as governments all over the globe sing the praises of the nascent recovery. Unfortunately there is no recovery, only a mirage of ever mounting debt.

Mike “Mish” Shedlock
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