Europe – The Worst Is Behind Us – or so I am being told..!

As a European, I’m really happy with Europe’s future prospects  – or so, I am told, I should be. Well, why then do I not feel happy?

Since the start of the New Year, I only hear good things on the subject. From Merkel to Draghi, everyone seems to agree that the worst is already behind us. In some cases I am also hearing inspiring comments stating that the likes of Portugal, Greece and Spain are now recovering well from the crisis and that the various tranches of bailout money was key for saving these peripheral countries from disgrace as the austerity measures being applied were not only necessary but also very effective! Really?

So, it is great to see that the medicine we are taking is producing some good results. It seems that Europe may finally be back on track. Let’s look at some of the recent stats to see if this rhetoric is well founded however…

To me, the best way to look at a country and check just how well it is doing is to look at GDP numbers and the attendant unemployment rate. No matter what stats someone chooses to present an economic reality, if GDP growth is negative and unemployment is rising, there’s something wrong with the country. So, let’s look at those numbers.

At the end of the third quarter of 2012, the overall unemployment rate was pointing to 11.5% in the Eurozone – 1.6 times higher than before the crisis started. Greece and Spain were especially hit  with these countries now experiencing three times more people out of work than before the GFC. If we look at GDP growth, we see that while Germany has been able to grow, peripheral countries are still under the cloud of recession (excluding the resurgent Celtic tiger – Ireland), and in the case of Greece, the crisis will have erased 22% of the country’s wealth at the end of this year, a destruction in productive capacity that is comparable with the 30% loss in GDP which occurred in the US during the Great Depression. Post the bailouts, things became even worse for Greece and Portugal, and in 2011 and 2012, they saw large decreases in GDP primarily as a consequence of the austerity “strings” attached to the bailouts. This just amplified the crisis in those countries in the short term.

Instead of trying to boost the Eurozone economy while looking to reign in debt, and which could have been achieved through quantitative easing, Germany imposed the worst possible social costs on these countries. The US Federal Reserve has had some good results from its quantitative easing programs and looks to have avoided such a deep crisis that has befallen these peripheral European countries. The UK has copied that path and even though the economic backdrop can hardly be described as a resounding success, it has certainly much better than the Southern Europe’s.

Austerity was imposed to control debt but, as the table below shows, debt hasn’t been cut as a percentage of GPD as the peripheral European countries ratios are higher today than they were in 2008. The reason? It’s pretty simple. You can’t reduce debt without growth.

In 2008 Greece had a ratio of gross debt to GDP of 113%, it now has 182%. Ireland, for example, has now almost three times the debt it had in 2008, and Italy and Portugal will both surpass 120% this year. So, after all it seems that the austerity measures have failed in all areas as they have simply wrecked GDP

Finally let’s look at the stock market.

While in the US, the country where the GFC started, the S&P 500 powers on towards all time nominal highs, in Europe equity indices are still depressed. In Greece, the FTSE/ASE 20 index has lost almost 90% of its value during the five year period between 2008-2012. Last year was a positive year for all European markets, but as we can see, there’s still plenty of room for recovery.

So, after all this, it seems premature to state that Europe is finally on track. Germany is growing but that isn’t the case for peripheral countries. The Euro is now safe from the worst but it most likely won’t be in the future. Peripheral European countries learnt that European institutions are not on their side. Serious wounds emerged from this crisis and Europe may now be fatally wounded. No one wants a dictatorship in Europe with Germany leading and the UK may be the first to say No. Last time that happened Nazi boots were marching through our glorious continent…

Somehow I still don’t feel happy…

Filipe R Costa