Greece, Portugal and Ireland are – so far – the euro area member states that have not defaulted just because the strong euro area member states have provided them with emergency funding. Those strong members of the monetary union will continue to provide emergency loans for some time to come. Until 2013 this will happen in an ad hoc fashion and, starting from 2013, within the framework of the European permanent mechanism to save the euro. Nice plan (kind of), but is it viable? Forget the long run, the question is whether it is even viable in the medium term?
Everyone, from politicians to analysts and economists to the media have gotten used to talking about the weak and strong euro area members.
But how strong is strong really? Germany, Finland, France, Belgium, Austria and the Netherlands for example are only perceived strong because they get compared with the likes of Greece and Portugal. If that is the yardstick, then numerous African countries are strong as well.
So I feel one should look closer into the government finances of the strong euro area member states and then determine just how strong they are instead of comparing them with the de facto default countries within the monetary union. It is not hard to look strong standing besides crumbling Greece.
Mount Debterest
According to the Eurostat statistics, in 2010 Belgium carried national debt of 96,8% of its gdp, which was still kind of good compared with the Italian debt of whopping 119% of its gdp. This is lower than the national debt of Portugal (93%). Mind you, these are figures for 2010. With high deficits in 2011, that debt mountain is higher now.
Looking further down the table one does not get much happier. Germany (83,2%), France (81,7%), Austria (72,3%) and the Netherlands (62,7%) all have sizeable – and increasing – debts as well.
This, sadly, is not the whole picture.
Starting from 2011 onwards, the heavy burden of ageing on government finances will start to play a role. Almost all European states are set to loose millions of inhabitants in the next decade.
Unless Europe unleashes some magical innovation-enhancing force, this will lower the economic growth and bring the government finances all over Europe into even worse shape that they are now in. It is straightforward. Economic growth depends on how many people are at work producing stuff and how efficient they are at it. Less people means those that keep working have to get more efficient just to prevent economic growth from falling.
Weak
Anno 2011, in the euro area there are two groups of countries. Either you are one of the strong ones, meaning you provide emergency funding for others, or one of the weak ones, meaning you are at the receiving end of emergency funding. There is no in-between, if you are not strong you are weak. Full stop.
For example, Spain does not need any emergency funding now (this was written on May 31st, one needs to state the date as in Europe you never know when another country might succumb under its debts and with Spain being one of the main suspects to become the fourth euro area member to de facto default, that need is the largest). But were Spain to ask for emergency loans, it would immediately move from the strong to the weak group. Hence, with every new weak country the burden increases for the, I hope I have made that clear by now relatively strong ones.
The question how strong strong really is and will be in the future, is crucial for the future of the euro area. As long as the deep structural problems many member states have, are not addressed and solved, the heartbeat of the euro (area) will be determined by how many euro nations remain in the ‘relatively strong group’ (that is, assuming somewhat heroically that they stay willing to bail out the likes of Greece). The fact is however that that species is on its way to extinction in Europe.
#1 by Lawrence on May 31, 2011 - 10:32 pm
Today it has been reported in the international media that
“Europe locked in ‘chaotic’ debate over Greece”
“Bank of Ireland signal at debt swap disappoints”
“Rising Irish consumer prices to add further pressure – poll”
“Fitch cuts Cyprus rating over Greek exposure”
“Danish economy falls into in recession, surprises analysts”
“ECB calls for tweaks in EC bank resolution plan”
And yet the politicians want to make the people believe that everything is OK and that the eu and the euro will be saved.
They are really either living in a world of make believe or are trying to take the people for a ride.
Either way the are wrong and when the people really find out what the situation is all hell will be let loose.
#2 by Pedro on June 1, 2011 - 6:49 am
“And yet the politicians want to make the people believe that everything is OK and that the eu and the euro will be saved.
They are really either living in a world of make believe or are trying to take the people for a ride.
Either way the are wrong and when the people really find out what the situation is all hell will be let loose.”
Some people are just always so positive, optimistic…..
(Yes folks, that is sarcasm).
#3 by Evert on June 1, 2011 - 12:32 pm
@Lawrence: The discussion about the trustworthiness of media hypes is one that will probably last forever. My view on them is this: in absence of concrete information, the various media start parroting each other to the point that less than 5% of all articles is based on genuine journalistic research. This is a classic gossip-to-panic model. I really don’t mind if that is employed by the gutter press when it concerns something so economically inconsequential as a certain celebrity’s undies, but it frustrates me that the so-called quality newspapers succumb to panicky gossip rudimentally based on speculation of economists located halfway around the world. Whatever your opinion may be on the degree to which European finance ministers are forthcoming with relevant information, we have to accept that they are probably most knowledgeable about the state of their country’s finances. Assuming they have learned lessons about lying about them from the Greek, my belief is that they are truthful but omissive.
On topic: 1. The debate focuses entirely on the liabilities of Greece, while they have assets that are estimated to be approximately just as vast. Let’s see what happens when they manage to sell a bunch of their state-owned enterprises. Likewise, I think soon more and more rich northerners will see whether housing prices in Spain have fallen far enough to be able to buy appartments on the Costa’s again.
2. A lot of the insecurity would have been absent if accounting rules with respect to government bonds would be equal for banks and pension funds. The latter have to account for the market value, while banks still report book values and thus inflated profits. Had there been transparency on banks’ holdings of euro debt, the impact of possible defaults would be far more predictable, and possibly less daunting.
#4 by Patrick on June 1, 2011 - 2:48 pm
@Lawrence
“international media” = Anglo-Saxon media
The headlines you have quoted are all from Reuters – hardly the most partial observers.
If you had looked at the real international media, you would have found a slightly different picture – so:
Europa blijft na te volgen model – (De Tijd)
“Europe remains the best model to follow” from a US professor
“Spain Shows Progress In Trimming Its Deficit”
Wall Street Journal Europe
Von echter Inflation weit entfernt (Handelsblatt)
“Not at all like real inflation”
#5 by Joe on June 1, 2011 - 5:12 pm
Selective items that make one feel better don’t tell a story either. All those things might indeed be true in and of themselves, but that is just as much a self-administered news-shlobobeth as anything else.
What market participants need is a truthful, unemotionalized picture, with gov’t statements not meant to raise fear nor optimism.
Otherwise we wouldn’t have heard all of these demands for a “two state solution” of one sort or another over teh past two years.
As to anything being “anglo-saxon”, therein lies another self-adminstered delusion meant to construct paranoia around a fake global enemy to rally self-pitying, yet irrationally-auto-aggrandizing gallic suprematists. In reality, French companies exhibet the extremes of all the negative traits characterized as “anglo-saxon,” among which they strangely never seem to include the essencially anglo-saxon of all the anglo-saxons: German investors, banks, and industries.
#6 by Lawrence on June 3, 2011 - 9:15 pm
Patrick the people have been taken for a ride by the eu politicians for far too long and for far too many times.
Hoe many times have people been assured that there was no problem with Greece and then it resulted in the present situation?
How many times were the people were assured on Ireland and the same thing happened again?
How many times were the people assured that there was nothing wrong with Portugal, only for Portugal to follow Greece and Ireland?
How many times was the same said about Spain and other countries which as usual have been denied but which are either in the process of happening again in the very near future or are on their way to the same situation as Greece, Ireland and Portugal?
The eu politicians have denied so many things so many times and they have been proved to be wrong or tried to deceive the people that sorry, no one believes them any longer.
It’s a repetition of the famous story of the shepherd boy who used to cry wolf so many times that when the wolf really came for the sheep no one believed him. This is exactly what has and is happened to the eu politicians. No one believes them any longer even if they might be saying the truth.
#7 by Felix on June 8, 2011 - 1:23 am
Debt/GDP ratio is a good indicator, but it over-used and over-abused. The reason is that GDP is an annual figure, while the Debt is cumulative over a number of years.
A family analogy would be: credit-limit / annual income. The thing is, that credit does not need to be paid in a year. Only the minimum payment (mostly interest and a small premium) must be paid annually. A family does not necessarily struggle with the maxed-out credit limit, but with what a burden are minimum payments relative to the revenue stream.
A better indicator for a country would be: Debt-Service / GDP. How much of GDP in *one year* is going to be used to pay pay debt interest in *that year*. Two countries with the same GDP and same Debt may pay a different % of GDP to service Debt depending on the interest rates they acquired that debt.
Then we can compare countries. Then we can understand why some countries can live with a higher Debt/GDP ratio (better rates) than others.
Debt-Service/GDP could also be compared directly to budget deficits, which is an apple-to-apple comparison.
Mr. Mujagic, it would be interesting to read a blog entry about the Debt-Service/GDP ratio for the main players in this debate (DE, GR, FR, ES, UK, IE, IT, PT).
#8 by Lawrence on June 8, 2011 - 10:44 pm
Patrick, is the EUobserver Anglo-Saxon media?
http://euobserver.com/9/32456
Germany fears ‘full-blown bankruptcy’ in eurozone
German finance minister Wolfgang Schaeuble believes Greek bankruptcy is imminent, according to a leaked letter, and argues that restructuring of the country’s debt is necessary.
“We are standing before the real risk of the first full-blown bankruptcy inside the eurozone,” Schaeuble said in a letter addressed to European Central Bank president Jean-Claude Trichet and leaked to the German press……
#9 by Betterworld on June 9, 2011 - 12:48 pm
Nice to see that the Germans have finally have woken up and smelled the Euros burning. Now, when are they going to throw the US double agent, Timothy Geitner off the Euro defense team? He is the one who blocked the bail outs and insisted on excessive interest rates for Ireland all to protect his buddies on Wall Street.
It is well past time to realise that they need to start bailing out the Euro ship, big time.
Now that they are finally awake, stopping the death-wish of ECB chief, Jean-Claude Trichet, who is now set on blowing another hole in the hull of the ship by raising interest rates should be their first priority.
#10 by Lawrence on June 13, 2011 - 10:37 pm
Evert, Patrick
Both the euro and the eu are on the way out and nothing can save them.
S&P have again slashed Greece’s rating to the lowest rating in expectation of defaulting making it the country with the lowest rating in the world putting it below Ecuador, Jamaica, Pakistan and Grenada.
The euro has fallen again.
Two US Republican Senators have asked Obama to order the US Representative on the IMF to stop any further aid tranches to Greece.
Greece is defaulting.
Ireland and Portugal are to follow.
Italy and others are in line for bailouts.
Romania is being investigating for cooking her accounts.
Better for the eu politicians and their servants in the member countries to stop taking the people for a ride and not waste any more money.
#11 by Joe on June 16, 2011 - 11:16 pm
What is it exactly that you would prefer to see? I mean, you’re just SO brilliant and informed, which mind you, is not the same as “constantly being peevish and aggreived over the same things”!
#12 by Isabella Balkert on June 21, 2011 - 1:08 am
Why does nobody ask, how and why the countries, who has broken every possible rule laid down by EU, as how the economy has to be, in order to be a member of the Euro Zone, has been allowed to stay in the Euro Zone, when it was crystal clear 10 – 15 years ago, that their economies were based on lies and hopefulness.
Why has Germany and France held a hand under these rotten economies for years and years, so in fact their own and the European economy is hostage to a Political idea, that has never had the soundness it should have or the support of the European people?
And why have the European leaders lied to their countrymen, and each other for so long?
Only a religious sect acts as stupidly, as untruthfully and as foolheartedly, as the European leaders in Europe, with their fanatical idea of the undemocratic origins and maintenance of the lobbyism ruled EU!
The ones still defending EU, must in my opinion be, those who cannot fathom the fall of the European union because they are working in and earning their living by EU means, or because they do not have the fantasy to see what has been going on for a very long time and what is about to collapse.
Greece will be the wake up call and the bankrupt of Greece, Spain, Portugal and Irelands will be the awakening and the truth that will set the European countries frie of EU, but the prize?! The Prize of the EU foolery for the European people will be devastating for a long time.
The question is – When the Euro and EU brakes down – What will the EU fundamentalistic politicians do, when they are being dismissed as trustworthy by the majority of the people they never thought about for one moment, when the going was good for the EU-Fundamentalist?
#13 by mmm on December 1, 2011 - 9:06 am
And do I remember earlier this year a certain someone suggesting Estonia borrow money now it is in the Eurozone?
#14 by mmm on December 14, 2011 - 1:34 am
I see the author chose not to reply to #13.