EUROZONE HEADS FOR ANOTHER CRISIS

“The problem is solved” said French President Nicholas Sarkozy just five weeks ago but we have seen recently that Spain is the next Eurozone country facing a crisis.

Spain is the fourth largest Eurozone economy and the twelfth largest in the world.

• Spanish GDP last year was almost five times that of Greece.

• Unemployment in Spain in March hit a record of 24% which is by far the highest in the industrialised world and more than doubles the 10% Euro average.  

• Almost one half of Spain’s young people are unemployed.

• Over 8% of banking loans are not being sustained.

In a bid to boost employment the Spanish Government passed new laws making it easy to cut wages and lay people off. The Spanish Unions have responded with a general strike and there have been serious political protests.

Spain has now tipped back into recession with GDP shrinking in the first quarter. The Government predicts a 1.7% contraction in 2012 which many analysts consider optimistic. As the economy slows, tax revenues fall and welfare payments rise which makes the fiscal position worse. The Government admit that the public debt will hit 80% of GDP by the end of the year.

Spain must repay nearly 12 billion Euro Bonds by the end of April and another 13 billion Euro loan at the end of July.

I hope Sarkozy has this all under control. The King of Spain obviously isn’t too bothered – he’s managed to get away from it all with a bit of elephant hunting!

Tim Corfield - May 2012

SHOWDOWN ON AUSTERITY GATHERS PACE

Germany and France have moved towards a bruising and potentially destabilising showdown on how to tackle the European debt crisis.

Francois Hollande has made a presidential pledge to re-open the EU’s financial pact. Angela Merkel said in response “the fiscal pact has been negotiated; it has been signed by 25 Government leaders, and has already been ratified by Portugal and Greece. Parliaments all over Europe are about to pass it. Ireland has a referendum on it at the end of May. It cannot be negotiated anew”.

There is a backlash across Europe against austerity and a greater emphasis on boosting growth and job creation. If Hollande wins the French presidency and also secures a parliamentary majority in June he and his team are committed to not ratifying the EU pact unless it is modified to include growth boosting policies. Technically, the pact can come into force without French ratification but this is politically inconceivable.

The Dutch Government has collapsed recently over a failure to agree on spending cuts and comply with the new rules.

Spain’s credit rating has been revised downwards recently because the austerity is defeating the chances of economic growth.

The Romanian Government has recently been ousted in a vote of no confidence triggered by opposition budget cuts.

The Czech Government is fighting for its survival.

Herman Van Rompuy said “Over the past two and a half years the EU has had to react to the economic and financial crisis. This has not been easy and lead to some frustration at times and strains. We have had to deal with the urgent pressures of the sovereign crisis. The emphasis should now shift increasingly to measures that can boost growth and jobs.”

Hollande responded robustly to Merkel “it’s not Germany that decides for the whole of Europe”.

Tim Corfield