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Anatomy of a crisis

· The European economy after the plan to rescue Portugal ·

The agreement to rescue Portugal opens a new phase in the European economic crisis. The risk of a domino effect for the economies of other countries, which only a short time ago analysts considered just a possibility, is proving to be a dramatic reality. At the moment, Brussels has only managed to propose short-term solutions which relieve the pressure of the markets on governments, without, however, resolving the root of the problem. The point is this: why have the means for an ordered restructuring of debt yet to be developed?
According to official sources cited by international agencies, the austerity measures which Portugal must embrace in exchange for EU-IMF assistance, risk putting the country in a recession for two years. The terms of the agreement are still unclear and everything depends on the support of the opposition. The official go-ahead, in any case, will not be given before the upcoming June 5 th elections. The fiscal plan that Lisbon must pass will create a contraction of 2% of GDP in 2011 and 2012. Taxes will increase, especially those on automobiles and property, and heavy cuts will affect public spending on health and schools.
In Greece, a year after the crash, things are not much better. Athens received a loan for 110 billion euro, repayment of which risks becoming impossible due to the tight time frame. According to experts, the country has debt of more than 340 billion euro and in 2011 could have a deficit near 8.4% of GDP, much higher than the projected 7.5%. Analysts expect growth to decline by 4% this year and another 3% in 2012, with the unemployment rate at 20%. Restructuring the debt appears inevitable, even if the Greek Finance Minister, George Papaconstantinou maintains that it would be, “a grave error.”
Ireland recently received the second installment of an international loan of 85 billion. Dublin has already requested a reduction of 1% on interest. Moody’s has lowered their rating to a level just above “junk.” But the true emergency at the moment are the banks: Allied Irish Bank has announced that annual losses have quadrupled to 10.4 billion euro in 2010 and that more than 2,000 people will be laid off. The government is studying a recovery plan for the sector based on a reduction of the number of institutions.
The plan to save Portugal also puts at risk countries that are considered stable. Apart from PIG, the Wall Street Journal has described Europe as “traveling at two speeds.” Industrial activity in April has increased due to acceleration in Germany and France but, “the slowing down of Spain and Italy highlight persistent divergences in economic growth.” The imbalance is confirmed also by data from Markit Economics on the PMI (Purchasing Manager Index), an indicator of industrial production. In the Euro zone, in April, the index rose to 58, compared to 57.5 in March, demonstrating that manufacturing production grew more rapidly compared to the previous month. German and French industry showed the best results. The PMI in Germany rose to 62 (from 60.9 in March), better than expected, while France reached 57.5 (from 55.4), its highest in the last five months. In Italy the Index declined to 55.5 (from 56.2) and in Spain to 50.6 (from 51.6)
Given this scenario, what is needed to put the European economic system on track? Some economists schematically group the response into three categories. The first involves normative mechanisms to prevent possible violations of common parameters. The most urgent are: defining transparent accounting rules to determine the budget deficit and public debt; reinforcing oversight to prevent economic bubbles; increasing sanctions for violations of the Stability and Growth Pact; and more prudent politics on the part of the European Central Bank. The second category of conditions, according to the experts, involves structural reforms able to reinforce long-term growth. This means not only reinforcing the single market by uprooting any form of protectionism, but also reducing the mass of bureaucratic apparatus which impedes the life and development of small and medium-size businesses. The third category of conditions includes structural reforms put in place to guarantee the absorption of other possible shocks.
Is it a valid recipe? Many analysts turn up their noses and point to the need for a political solution to guarantee the success of the plan. In a monetary union, either everyone grows together or there is no growth. The problem is what price governments are willing to pay.




St. Peter’s Square

Jan. 27, 2020