European debt reduction set to make matters worse


SERIOUS MONEY:THE FIRST golden age of globalisation spanned more than four decades from the late nineteenth century, coming to a shuddering end on June 28th, 1914, when an unknown Serbian, Gavrilo Princip, forged himself a permanent place in history with the assassination of Archduke Franz Ferdinand, the heir to the Austro-Hungarian throne, in Sarajevo.

The actions of Princip and his Black Hand revolutionaries precipitated war across the European continent that achieved little but the deaths of countless fighting men.

Unfortunately, the so-called “war to end all wars” did not match its billing and the conditions enshrined in the Treaty of Versailles and subsequently imposed upon a defeated German nation virtually ensured another depressing chapter in Europe’s bloody history.

The harsh programme proved self-defeating as a downtrodden people in their search for leadership amid the chaos propelled Adolf Hitler and his henchmen to power. There is no need to expand on their exploits.

Fast forward to today and the roles have been reversed. The Germans, under the leadership of chancellor Angela Merkel, wish to impose their will upon the rest of Europe but what is demanded is neither achievable nor desirable, given the unacceptable social costs. One need look no further than Greece to see the destruction that is a direct result of the austere policies imposed by the troika and endorsed by Merkel – the outcome, it is fair to say, is a failed economic state.

The demands placed upon Greece were never likely to work and basic arithmetic said as much. A high marginal propensity to consume that is moving lower as desired savings rates edge higher, combined with a low marginal propensity to import and uncompetitive export base means aggressive fiscal consolidation was doomed from the outset. All told, the medicine prescribed has killed the patient.

The world’s capital markets will move on, of course, and investors will almost certainly have Portugal in their sights, as the deep-seated problems in that economy don’t look much better than Greece.

The Republic has decoupled from its troubled brethren in the euro zone, not because of any public sector achievements but a return to current account surplus and less dependence on foreign sources for financing.

Be that as it may, the turnaround in the Irish situation is wholly dependent on the euro zone staying recession free from here to infinity. Non-financial private sector debt as a percentage of GDP, accumulated to obscene levels in this State under the watchful gaze of those who should have known better, remains off the charts compared to the rest of the developed world despite deleveraging.

Unfortunately, a European recession is almost certainly written in stone at this juncture. Dithering by policymakers, who seem incapable of distinguishing between liquidity and solvency crises, has undermined market confidence to such a degree that the financial market response is almost certain to produce the dreaded double-dip. More to the point, recent data releases all point in that direction.

A further downturn in economic activity before the region even comes close to recovering its pre-recession peak could well put an end to the European project. Even before a recession is considered, back-of-the-envelope calculations indicate that Greece will not recoup its lost output for 10 years, and Ireland and Portugal should not expect to see expansion from former peaks until the second half of the decade.

Of course, those predictions are predicated upon a “softly-softly” upward trajectory in each economy’s fortunes. It is safe to say that such an approach rarely matches reality and will ultimately prove to be fantasy in the context of an all but certain downturn.

The crux of the matter is not a renewed downturn of itself but the unacceptably high levels of unemployment to begin with, particularly among the young. The latest reading on unemployment rates across the euro zone is hardly pleasant at 10 per cent but levels of youth unemployment can be described as nothing less than a social tragedy. Fiscal consolidation programmes across the region, as endorsed by Germany, will almost certainly make matters worse.

Digest the numbers but be warned, they are not pretty. The latest readings show that the rates of youth unemployment are highest in Spain at 45 per cent, followed by Greece at 43 per cent. Ireland, Portugal and Italy are not far behind with levels close to 30 per cent. No matter what persuasion one comes from, these numbers are unacceptable.

The euro stands at a crossroads but, no matter what is endorsed by the politicians who succumb to German demands, nothing can escape the fact that such prescriptions have already delivered a failed economic state. Be warned, Ms Merkel, Europe’s future may well be decided on the streets.