Over the last couple of years we have seen many false dawns with regards to potential resolutions to sort the Euro crisis and in many ways investors are losing patience. There have been attempts to play down the crisis, attempts to inject confidence back into the investment markets but ultimately the Euro and the European economies still remain relevant targets for speculators. The fact is that there are weaknesses across the Eurozone, there are weaknesses within Europe and these are being cruelly exposed at this moment in time.
We therefore thought it would be interesting to see when expats in Australia believe the crisis will be solved and to try and gauge the opinion of a range of different expat groups. However, before looking at the results we will take a look at the local economy of Australia to give some background. The survey, conducted in conjunction with Barclays International, revealed some very interesting answers.
The Australian economy
Australia is fairly unique because despite the fact that European countries are currently experiencing a double dip recession, which began in 2008, the Australian economy has not yet entered recession. Indeed economic growth in excess of 4% is expected during 2012 and many experts believe that the Australian economy is one of the best positioned in the world. It would be misleading to suggest that the overall Australian economy is booming because the vast majority of the growth is coming from the mining sector. However, the government has made use of this additional income and additional investment to assist other areas of the economy which may be struggling.
When you also take into account the fact that we have multibillion euro budget deficits across Europe it is amazing to think that the Australian government is currently on target to deliver a budget surplus for the financial year 2012/13. While some experts may suggest that Australia has been “lucky” with regards to its relationship with China and India, which are growing economies, the reality is that years of investing time and money in future projects and future sectors is beginning to pay major dividends.
It is also worth noting that the Australian dollar is currently just off record highs as many worldwide investors see the country as something of a safe haven due to the fact that economic growth is forecast for this year, inflation is under control and the employment market is still relatively strong. Against this background you would expect some optimism with regards to the euro from the expat community so let us take a look at the results.
We asked the question, will the Euro crisis be solved by the end of 2012?
The figure of 2.63% is well below the poll average of 13.36% and indeed it is the lowest of the major expat communities involved in the poll. This would seem to suggest that the Australian community is fairly certain that the Euro crisis will drag on for many years to come and a resolution by the end of 2012 appears almost impossible. Quite why expats in Australia are so pessimistic is a little puzzling but with economic performance in Australia having been slightly volatile of late perhaps the Australian politicians have used the European crisis as an excuse?
Many governments around the world have been exploiting problems in Europe as a means of deflecting any shortfalls in their own economies and their own economic management. However, the reality is that the European crisis is having an impact around the world and economic growth in Australia would likely be stronger if the crisis was over. Interestingly we saw the Reserve Bank of Australia suggesting that even if the European crisis was to get far worse this would have little impact upon the Australian economy because it is well-positioned and not as dependent upon Europe as it has been in the past.
The above-average no vote in Australia will come as no surprise when you bear in mind the comments we have made above. The reality is that European leaders have time and time again promised a resolution to the problem only to falter at the last minute and see deals and agreements breakup. The truth is that many investors have lost confidence in European leaders and we are now at a stage where actions speak louder than words despite the fact that historically a few confident words from European leaders were enough to calm the nerves of investment markets.
In some ways you could argue that the Australian government is fighting a losing battle because ever-growing scepticism about the European problem will at some point filter into investment plans and future policies for the Australian economy. Human nature dictates that in times of trouble and in times of concern we will pull back and await a clear path before committing ourselves. This is a policy and strategy which is likely to be replicated within the business community if the crisis was to get any worse.
There are still a number of expats in Australia who are both optimistic and pessimistic to a lesser extent and remain undecided as to whether the European crisis will be resolved by the end of 2012. The reality is that it will take a major shift in policy and strategy from European leaders, and other worldwide governments, to ensure a swift resolution to what is a potentially catastrophic problem. Turning investor confidence positive around the globe will be very difficult and the ever depressing headlines of recent days regarding Spanish sovereign debt are not helping.
Time and time again we have seen European leaders and pro-European economists attempting to downplay the problems across Europe. However, the reality is that the issue is getting much worse and is likely to deteriorate further before any major movement forward. There is still much bloodletting to be had across Europe although on the positive side, if the euro was to survive these ongoing problems then in the longer term it would probably be a stronger currency and a very different Eurozone and European Union structure. There are pros and cons to the current issue although at this moment in time it is difficult to see any light at the end of the tunnel.
The European economy
The European economy as a whole has taken a major battering over the last couple of years and as debt continues to mount across the Eurozone it is inconceivable that the economy as a whole will move back into positive territory in the short term. We’ve already seen the decimation of Ireland, Greece and Portugal and with Spain literally on the edge of a precipice there are few positives to take out of the current situation. In many ways the only European economy holding up is Germany although it is starting to show signs of weakness and indeed the credit rating agencies have been contemplating possible downgrades of German sovereign debt ratings.
One of the major problems which European leaders have at this moment in time is the fact that investor confidence in European economies and European markets is absolutely shot to pieces. In many ways they are paying the price for false dawns of months gone by when agreements “had been reached” only for them to unravel sometimes within hours of their announcement. The very fact that the UK economy, which is actually outside of the Eurozone and has not adopted the euro, fell by 0.7% in the second quarter of 2012 is a perfect reflection of ongoing problems. This degree of economic collapse is likely to be replicated across many European countries and indeed many will experience a steeper fall in economic growth. Historically governments would have revalued their currencies in times of excess economic distress but the fact that the euro is used across the Eurozone, with many different economies, different strategies and different budgets, makes this impossible.
There is growing concern that the European economy overall will continue to fall for the foreseeable future and indeed economic growth may not be revived until 2014 at the earliest.
Those who follow the euro will be well aware that it has fallen to record lows against a variety of major currencies around the world. Investor confidence has disappeared from the currency and indeed there are still many economists predicting a doomsday scenario where the Eurozone will be dismantled and the euro will disappear. Whether or not this is the case remains to be seen because a number of prominent worldwide institutions have expressed the opinion that they will do whatever it takes to save the euro and the Eurozone. While this has given some short-term optimism to investment markets, again, we will need to see actions rather than just words!
When the euro was launched it was seen as a potential threat to the US dollar on the worldwide trading stage and indeed was put forward as stage one of a move towards a more centralised Europe and a federal Europe. However, there were a number of prominent economists who were already suggesting the project was flawed and the euro and the Eurozone would encounter serious problems in the short, medium and longer term. Many of these leading economists were ridiculed in the mainstream press and their reputations were very swiftly taken apart. But looking at the situation today, who was right?
At this point in time it is difficult to see any positives for the euro in the short to medium term with European interest rates at rock bottom, economic growth flatlining at best and budget deficits emerging on a frightening scale. The currency is facing its most difficult test to date and there are serious concerns us to whether it will survive in the longer term.
Over the last few days we have seen a mixture of different opinions and different strategies emerging although in light of the increase in Spanish sovereign debt interest rates, now in excess of the tipping point of 7%, action needs to be taken sooner rather than later. The Spanish government continues to deny that a bailout is required although many believe this is a simple ploy for the Spanish authorities to save face and await the offer of a bailout from European leaders.
Contagion is most certainly the in word at the moment and with the Spanish economy on the verge of collapse, and in need of a potential €500 billion bailout, investors have already got the Italian economy in their sights. One by one they are picking off some of Europe’s largest and most successful economies and exposing major flaws in the structure of Europe and the structure of the euro. While we have seen some more positive comments from the European Central Bank and other such financial institutions around the world, again, it will take action rather than words to get the confidence of investors moving.
We are now at the stage where rumours and counter rumours are emerging on a daily basis and indeed just today it has been suggested that the Spanish government has been in informal talks with their German counterparts about a €300 billion bailout. This has been denied by all parties but at this moment in time investors believe that there is “no smoke without fire” and things are happening behind the scenes. These are the kind of episodes which dismay investors because everything is done behind the scenes and what is said in public is not always what is meant.
If there is one positive that we can take from the ongoing European crisis it is perhaps the fact that many governments around the world, who have no direct association with the European economy, now appear willing to invest in the bailout fund. The reality is that countries such as China, India and Australia, which are all experiencing economic growth, have a vested interest in getting the worldwide economy moving again and can also use the ongoing problems as leverage to increase their influence in the future. The only real long-term resolution for this current crisis is for all major governments around the world to come together with a concerted effort to refinance and restructure the European economy. When and whether this will happen remains to be seen.
Despite the fact that many people believe that there is too much time and money already invested in the Eurozone and the euro there are still some who believe we could see a dismantling of the whole structure. There have been rumours for some time that the Greek government will at some stage exit the Eurozone and the euro although the longer this goes on the more chance that others will follow. It seems that European leaders are looking towards a structured exit for some of the more troubled economies of Europe, such as Greece, but whether this will happen remains to be seen.
There is also growing concern amongst many politicians that Germany is pushing harder and harder for a federal Europe with central controls on the budgets of all members. This is something which the UK government and the UK population has been firmly against for some time although in reality David Cameron could find the UK locked out of a restructured European economy in the future. There is a suggestion that the only real solution is for all member states to come together and appoint a central government for Europe which would therefore allow the combined strength of all European nations to be ploughed into various trouble spots.
Despite the fact that many governments appear dead set against a federal Europe in many ways this may be the only long-term resolution to the current problems. Unless the structure of the Eurozone and the euro is rectified it may well be open to further speculative attacks in the short, medium and longer term.
The euro was launched some time ago in a blaze of glory and seen by many as the European equivalent of the American dollar. There have always been concerns that countries such as Germany have a hidden agenda which would see it move towards a federal Europe over which the German authorities would have significant influence. This is starting to come to light today with the German authorities literally ruling the roost and having their hands firmly around the European purse strings.
The reality is that the European debacle cannot be allowed to continue for much longer because investors are losing confidence, budget deficits are mushrooming and unemployment across Europe continues to grow. In the early days the impact of various credit rating agencies downgrades was fairly severe but in recent times it seems that investors are discounting their negative comments and many downgrades. They are looking towards the longer-term picture which will see a restructuring of Europe although to what extent this will be remains to be seen. Expats in Australia are very pessimistic at this moment in time regarding a potential resolution in 2012 and in many ways you can understand this stance and the fact that the longer it goes on the more chance it will impact the Australian economy. Literally every country and every economy in the world is being dragged into the European problem!
To find out more about the euro crisis and how it will affect you, read the Barclays International guide: Challenges facing the Euro.