The Sick Men of Europe
A checkup on the continent's crisis-ridden economies.
Greece continues to be ground zero for the European financial crisis. Experts from the European Union, the International Monetary Fund, and European Central Bank are in Athens this week to test whether the country is complying with the terms of its EU bailout package. German Chancellor Angela Merkel has suggested that the rescue might need to be renegotiated based on their findings. At stake is whether the country will receive its latest 8 billion euro tranche of the 110 billion euro bailout — though most analysts agree it’s a Band-Aid, at best. Germany’s parliament is voting on Thursday on whether to approve enhanced powers for the eurozone’s bailout fund — known as the European Financial Stability Facility — thought critical to ensuring Greece’s solvency going forward.
Prime Minister George Papandreou was in Germany this week to plea for more aid from the German government and business leaders, describing his country’s recent efforts to cut debt levels as “superhuman.” He pledged a budget surplus by 2012.
In order to plug a budget gap that would have put the latest bailout tranche at risk, the government passed a controversial new property tax this week. Further austerity measures could include an additional 20 percent wage cut for various segments of the public sector (on top of the 15 percent cut they’ve already absorbed), a 4 percent reduction of pensions, and more tax increases. Greece is aiming to reduce its deficit to 7.5 percent of GDP by the end of this year from 10.5 percent last year.
With the new measures, Greece appears to have avoided a default for now, but possibly at risk of further damage to the country’s social stability: A new round of strikes and demonstrations has swept through Athens with more planned for next month.
The Portuguese government got an unwelcome surprise this week when it was discovered that the regional government of the Madeira Islands, a North Atlantic archipelago considered part Portuguese territory, had failed to report roughly $1.4 billion in debt. The islands may now need a $6.9 billion bailout from the central government at a time when Lisbon is desperately trying to get its own house in order.
Portugal received a $116 billion bailout from the EU and IMF in May. The country has undergone a painful series of austerity measure since then, including freezing salaries for state workers, raising taxes, and selling stakes in some of the country’s biggest companies. Further measures could include cutting more than 1,700 government jobs. The measures are intended to cut the deficit to 5.9 percent of GDP this year from 9.2 percent last year. Thus far, Prime Minister Pedro Passos Coelho has had strong support for the cuts from parliament.
All the same, unemployment is at its highest rate since 1983, and the economy is expected to remain in recession for at least two more years. The country’s credit rating was downgraded to junk status in July. More people are also leaving Portugal than at any time since the end of dictatorship in 1974, mostly to the former Portuguese colonies of Brazil, Angola, and Mozambique. In a striking role reversal, Angola’s state oil company and the family of its president have invested heavily in Portugal. Former Brazilian President Luiz Inacio Lula da Silva also toured Portugal, urging Brazilian companies to invest in their former colonial master.
According to the latest Spanish central bank figures, the country’s economy grew at an anemic 0.4 percent in the first quarter of 2011 and only 0.2 percent in the months after that, putting the government’s goal of 1.3 percent growth for this year in serious doubt. The unemployment rate remains stubbornly high at nearly 21 percent, and the Spain’s public debt has climbed to a 14-year high of 65.2 percent of GDP. The Spanish housing market, where rampant speculation was among the initial causes of Spain’s debt crisis, is also still in disarray, with mortgage approvals falling to record lows.
To reassure markets that Spain will avoid the fate of Greece and Portugal, Spain’s parliament this month narrowly passed a constitutional amendment, which will restrict annual deficits to 0.4 percent of GDP except during times of crisis. Another law will require the government to curb the accumulated debt to below 60 percent by 2020. The government is also raising money by forcing companies to pay some taxes earlier and requiring hospitals to buy cheaper generic drugs. These measures followed harsh austerity cuts last year, which included freezing pensions, cutting public-sector wages, and raising the retirement age.
The constitutional amendment, supported by Spain’s ruling Socialist Workers’ Party, was met with street protests throughout the country and prompted a walkout in parliament from leftist and regional parties. Prime Minister José Luis Rodríguez Zapatero dissolved parliament on Sept. 26 and has called for early elections within the next few months. Polls show the Socialists trailing the conservative People’s Party.
If you’re looking for a glimmer of hope on Europe’s periphery, it’s probably Ireland, which grew by a stronger than expected 1.6 percent in the second quarter of this year, the second-highest rate in the eurozone, driven largely by export growth. Industrial and agricultural output was also up. Some commentators are suggesting that this could be a sign that the harsh austerity measures instituted by Ireland (contingent on the $113 billion bailout it received last year) — which included raising taxes, lowering the minimum wage, and cutting the government’s payroll — are working.
But Ireland is certainly not out of the woods. Under the terms of the bailout deal, Dublin needs to draw up more austerity plans in the next few months to reduce its budget deficit to 8.6 percent of GDP, which will necessarily take capital out of the fragile economy. Ireland’s export-driven growth is also highly sensitive to conditions in the global economy, so Europe’s sluggish 0.2 percent growth is hardly good news for the Emerald Isle. Unemployment remains at 14.5 percent and would be even higher if the emigration rate weren’t at a 20-year high.
Bleak as the European economy is at the moment, what really keeps EU leaders up at night is the rapidly deteriorating situation in Italy, which has a nominal GDP almost seven times the size of Greece’s. It’s widely accepted that a bailout — if it comes to that — would overwhelm the eurozone’s resources. Italy’s debt currently stands at 120 percent of GDP. Standard & Poor’s downgraded the country’s credit rating from A+ to A in a surprise move on Sept. 21, putting the world’s eighth-largest economy below Slovakia and on a par with Malta. Consumer confidence is at a three-year low.
This month, Italy pushed through a package of tax hikes and spending cuts aimed at achieving a balanced budget by 2013. But this isn’t going to solve the underlying problem of sluggish growth. The government’s forecasts were revised down this week, with only 0.7 percent growth expected this year and 0.6 percent next year.
As it did in the U.S. downgrade in August, Standard & Poor’s also based its assessment on Italy’s fractious political system, predicting “continuing future political uncertainty about the means of addressing Italy’s economic challenges.” Not that it needs saying, but having a prime minister embroiled in a series of increasingly explosive legal and personal scandals doesn’t help matters.