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Europe by 2020: Are We There Yet?

Tuesday, November 06, 2012

Remember Greece and how the threats flew that it would be kicked out of the euro? The game of chicken came to an end and Greece won. Spain is in the same boat, but this time, and unlike Greece, Spain is not willing to accept the bailout conditions. Let’s see who blinks first, and let’s not forget that we’re all in this together, and either everyone is saved, or everyone drowns. That’s the Spanish message in an nutshell.

Meanwhile the usual mantra that everything is under control continues to be played, although the lyrics have not changed over the last two years while the music is becoming downright annoying. According to El Pais, a Spanish newspaper, the economy in Spain will contract 1.5% in 2013, three times worse than previously predicted. Without a doubt, we try to analyze a multitude of ever changing numbers and economic data, but the best approach is to listen to key headlines and statements and try to make them fit.

A celebratory mood of sorts ensued when it was reported that the Spanish deficit was reduced to 3.9% from 4.4%, mostly due to an increase in the VAT from 18% to 21% and the resulting revenue. But how is the VAT revenue sustainable when unemployment keeps rising? Next door, Portuguese Finance Minister Vitor Gaspar stated that “it will take several decades to achieve public debt levels below 60 per cent [of GDP] provided for in the Treaty of Lisbon.” In addition, Greek style haircuts for holders of Portuguese debt are quietly coming to the forefront. Angela Merkel — and let’s keep in mind that politicians always deliver the rosier scenario — opined that “we need a long breath of five years and more,” referring to the resolution of the current crisis.

As we await the next Greek vote on austerity, one must wonder where have the “savings” gone, and why is it that the stabilizing effect that should have been produced by all the measures introduced thus far is nowhere to be found. After all, the Greek “government predicted a worse-than-expected recession in 2013 and said its debt would grow to 192 percent of gross domestic product in 2014, about 10 percentage points higher than earlier forecast.” Seriously? In addition, “that has increased the prospect of another round of debt restructuring, a source of conflict between the IMF and Greece's biggest EU creditor Germany. Both privately say Athens' debt trajectory is unsustainable, but Berlin says any prospect of euro zone states taking another ‘haircut’ on their loans to Greece is unacceptable.” How does that work?

As we continue to monitor the GIPSI — Greece, Ireland, Portugal, Spain and Italy in order of default — we must keep an eye on the eurozone’s stronger members, and the “IMF warns over-taxed France risks slipping behind Italy and Spain,” as reported by The Telegraph.

Throwing the guantlet at the feet of the Socialist president Francois Hollande, the IMF said rising tax rates are undermining France as a place "to work and invest" and leading to a "significant loss of competitiveness".

Advice has taken on many faces because in June of this year the “IMF calls on Spain to raise VAT and cut public-sector wage bill,” while “Mr Hollande who cut VAT in June to protect buying power and has just raised company taxes yet further in the 2013 budget,” must be at a loss. Yes, the idea is to reduce corporate tax rates to “enhance” competitiveness, but they are about the same in France and Spain — 33% and 30% respectively.

While we can play and adjust positions on a daily, weekly and monthly basis, the macro European picture is certainly nothing to celebrate. Although politicians will keep the charade alive for as long as possible, the fact remains that the large and still hidden bills will come due, while Germany's economy is in erosion mode.

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