In spite of years of harsh spending cuts and tax increases, Europe’s debt problems are getting worse.
Official figures showed on Wednesday that the total debt of the 17 countries that use the single currency at the end of the second quarter was worth 90 per cent of the value of the group’s economy, the highest level since the euro was launched in 1999.
The rise from the previous quarter’s 88.2 per cent and the previous year’s equivalent of 87.1 per cent, as reported by Eurostat, the EU’s statistics office, is a result of the eurozone’s economic problems which are making it harder for countries to handle their debts.
“The euro area economy remains stuck in a rut,” said James Ashley, senior European economist at RBC Capital Markets.
According to Eurostat five of the countries that use the euro are in recession Greece, Spain, Italy, Portugal, and Cyprus. Many analysts expect the eurozone to slip back into recession in the third quarter of the year when official figures are published next month. A recession is technically defined as two quarters of negative growth in a row.
Other figures on Wednesday pointed to a deepening economic crisis in the eurozone. The purchasing managers’ index a gauge of business activity from financial information company Markit fell from the previous month’s 46.1 to 45.8 in October its lowest level in more than three years. Any figure below 50 indicates a contraction in activity.
Meanwhile, a closely watched survey from the Ifo Institute found business confidence in Germany, Europe’s biggest economy, confounded expectations of a modest increase and dropped for the sixth month in a row. Ifo’s key figure for October dropped to 100 from 101.4 in September.
Germany has been the main reason why the eurozone has not fallen into recession. The country’s powerhouse exporters, such as Volkswagen and BMW, have taken a slice of rising trade volumes around the world while its consumers have shown an increasing appetite to spend. However, the country’s economy has recently lost its momentum as the debt troubles on its doorstep have weighed on economic confidence.
A shrinking economy makes the value of a country’s debt as a proportion of the size of its economy worse. Over the past year, Italy’s debt burden, for example, has risen from 123.7 per cent in the first quarter to 126.1 per cent in the second quarter that’s come while its economy has shrunk for four straight quarters.
Greece’s finances, though, are in a league of their own. The country, which is struggling to convince debt inspectors that it’s fulfilling pledges it has made in return for billions of euros worth of bailout cash, saw the biggest quarterly increase in its debt burden to 150.3 per cent of national income in the second quarter from 136.9 per cent in the first.
The increase comes despite a dramatic fall in debt in the first quarter after Greece had successfully negotiated a deal with private bondholders to accept a write down of their Greek holdings. The country’s debt was reduced to 280 billion in the first quarter from 341 billion in the second quarter of 2011 as a result of the write down.
But any advantage gained is slowly being whittled away by the country’s deep recession, which appears headed for a sixth year. Interest on the debt, as well as continued budget deficits, pushed the debt back above 300 billion in the second quarter of 2012.
In the second quarter of 2012, the Greek economy was 6.2 per cent smaller than the same period the previous year and all forecasters think the recession will last for a while longer, especially as the country readies to implement even more austerity measures. Lower wages, for example, will impact consumer spending, often a vital ingredient of economic growth.
Having understood the practical difficulties in deficit cuts German
Chancellor Angela Merkel had purportedly taken a soft stand on
austerity. Germany will be ignoring the deficit reduction targets
clamped on Greece in exchange for additional bailout. Greece is
privileged for getting concession from IMF by getting two more years
to achieve the agreed targets and buys time for introducing austerity
measures. Thus Greece can maneuver its economy for reforms enabling to
return into the bond market for raising adequate amount within two
years. Still there is some delay in giving the required green signal
by Germany that is the reason why the spokesperson of Chancellor
Angela Merkel had expressed some sort of reluctance to confirm its
decision. As far as Spain is concerned, it is imposing new austerity
measures so as to enable it to pre-qualify it for eurozone aid. Tough
budget cuts are expected in Italy, Portugal, Ireland which are very
much in the grip of currency crisis and unemployment. Now the China, world’s second largest economy is getting loosened and
many U.S MNCs have become more dependent for their future prospects.
Though Chinese middle class’s buying power is not fully unleashed, U.S shipments to China have grown fivefold. In the long run U.S will have to face the
challenge, while the fastest growing Chinese economy slows down.U.S MNCs are really counting the emergence of Chinese economy from the slowing growth in EU and U.S. But Chinese economy’s slowdown will presents a test for U.S. multinationals. Of course there is a deviated thinking that the Chinese slowdown will turn out to be good to U.S as it will prompt China to shift its emphasis from exports and investments. A slower GDP growth in China will become a boon to those
U.S. companies that hope to expand with a toehold in selling to
Chinese consumers.
The reason for Eurozone slipping into recession can also be partially
attributed to the sluggish attitude of the European work force in the
aforementioned countries. People are not willing to spend more hours
working and the countries themselves are quite unenterprising in
fostering business and seeking foreign investors. Merely representing
the economy in the form of numbers will never reveal the reason behind
the Eurozone's recurring economic nadirs.
Please Email the Editor