Over the last few months there has been nothing but doom and gloom across the European economy with governments struggling to refinance their debts and bailout packages already dished out to a number of Eurozone members. We therefore thought it would be interesting to take a look at the expat community around the world and gather their views on the Euro crisis and whether they believe it will be solved by the end of 2012.
The survey, conducted in conjunction with Barclays International, revealed some very interesting voting patterns emerging across-the-board and while we will consider the votes from Canadian expats we will first look at the prospects for the Canadian economy.
The Canadian economy
Canada, much like Australia, is plentiful in natural resources and has avoided a recession since the US mortgage crisis back in 2008. This has made Canada a very attractive prospect for many expats and indeed the economy is still growing and is likely to do so for at least the next two years. However, a number of experts have stepped forward to suggest that the Canadian economy may well experience a “rough ride” over the next two years with GDP growth expected at around 2%.
While this may seem a little disappointing when you bear in mind the recent strength of the Canadian economy the fact is that each and every economy around the world is in some way linked to Europe and beyond. The European situation is having an impact upon money markets which is having an impact upon money supply which is impacting upon business profitability. Canada has for some time been a very attractive area of the world for the expat community with an array of employment opportunities in many different areas of the country.
It is very easy to see the similarities between Canadian economic growth and the growth which the Australian economy has experienced over the last decade. These are countries which are plentiful in natural resources, have for some time been overlooked by the worldwide community but are most certainly venturing out on their own. In the longer term many experts believe that Canadian economic growth is still in its infancy and there is significant potential for the future. However, we will now take a look at the opinions of the expat community with regards to the Euro crisis and whether this will impact investor confidence and the Canadian economy going forward.
In response to the question, will the Euro crisis be solved by the end of 2012, the response from Canadian expats was as follows: –
The yes vote came in at 15% which is slightly above the average for the overall poll and is probably in some way linked to economic growth and the prospects for Canada as a whole. It is very easy to be a little more positive when your economy is growing and you are not yourself feeling the effects of budget cuts and an economic crisis on your doorstep. That said, it is worth noting that the Canadian authorities have already introduced a variety of austerity measures something which caught the attention of David Cameron and was in many ways a blueprint for the UK strategy.
The reality is that the Euro crisis is unlikely to be resolved in the short to medium term although if we see a sudden return of investor confidence, assuming European leaders can put together a long-term rescue package, then who knows. In truth, the situation facing us today across Europe is like nothing seen in living history and therefore nobody really knows what will, what could and what might happen.
We are all very much in the dark!
If you take a look at the investment markets around the world the opinion of investors on the whole is that the Euro crisis will not be resolved by the end of 2012 and indeed it may take decades to filter through the system. This is the reality of the situation today, the need for multibillion euro bailouts when funds are relatively scarce, a banking system which is on the edge of collapse and investors and speculators looking for the next target.
At this moment in time Spain is very much in the firing line with sovereign debt interest rates now well over 7% which many see as the tipping point to an almost certain economic bailout. Despite the fact that the Spanish government is adamant that no bailout is required there have been rumours today of a potential €300 billion agreement with German counterparts although this has been refuted. Investors are already eyeing up their next target with Italy seen as the next potential economy to fall. If you take a step back and look at the situation from an outsiders’ point of view it seems that European economies are falling like dominoes!
Time after time we have seen European leaders stepping forward with a suggestion that an agreement has been reached between all parties only for this to unravel sometimes within a matter of hours. It is therefore not surprising that a small number of Canadian expats who took part in our online poll are undecided as to whether the future is brighter than many are assuming. Again, as we mentioned above, nobody in living memory has been in a situation anything like today and therefore nobody can look to the future with any real knowledge or confidence.
If the European debacle is to be resolved in the short term we will have to see a massive shift in investor confidence which is the key to the future. Investor confidence will turn before the markets turn and indeed it will occur well before the actual European economy improves. Historically a few confident words from European leaders was more than enough to see investment markets pick up but confidence is at rock bottom with regards to broken promises and investors are now looking for actions rather than words.
We have seen rumours and counter rumours of possible bailout packages behind-the-scenes and there are signs that more developed countries are now joining the rescue team. Hopefully, we should see more good news in the short to medium term because this drip feed of bad news is having a monumental impact upon confidence.
The European economy
Depending upon who you speak to, the European economy is either in a double dip recession, although not officially, or on the verge of a double dip recession. The consensus would suggest that we are already there but we await official confirmation from the European statistics bureau. The reality is that a lack of confidence in European leaders has had a massive impact upon consumer confidence and business confidence and all investment plans across Europe seem to be on hold. This has led to consumers holding back on significant spending, for fear of financial hardship in the short to medium term, which is impacting business profitability and ultimately leading to cost cuts and increased unemployment.
The real problems potential lay ahead with the worldwide money markets now on a knife edge with liquidity very low and central banks having to make up shortfalls on a regular basis. If you cast your mind back to credit crunch part one this had a dramatic effect on the worldwide economy and the European economy in particular with many market participants running for the hills and European banks struggling to maintain liquidity. Central banks around the world have been printing money for some time now but ultimately this situation cannot go on forever.
If you take a look at individual European economies you will see that the UK has already fallen back into it double dip recession, Spain has followed suit and France is rumoured to be on a knife edge. It is only really Germany which is holding steady with any kind of confidence although the longer the situation goes on the more chance this will change. Germany is literally the key to European growth in the medium to longer term and Chancellor Merkel is well aware that she has her hands firmly on the European purse strings and can literally dictate strict austerity measures for those in need of financial bailout funding.
The euro has always been a fairly controversial currency since inception with many experts believing that it was ultimately flawed from day one. However, the currency was released into the wider world in a blaze of glory and the Eurozone came into being. Those experts who had predicted a similar doomsday scenario to the one we are seeing today were ridiculed and their reputation shredded by the pro-European press but ultimately their voices of concern were drowned out by the euphoria.
Today we see the euro at record lows against a basket of worldwide currencies, we see investors running for the hills and currencies such as sterling and the dollar continued to attract safe haven money. European leaders had hoped that the euro would become something of a safe haven when it was created but there are very few currencies attracting such pessimism today as the euro. In a perfect world this reduction in the value of the euro would play into the hands of European companies exporting overseas but there is such little demand, such little business confidence and pressure on worldwide trade that this is having very little or no impact.
European leaders have on numerous occasions attempted to inject confidence into the worldwide money markets and currency exchanges but to no avail. Initially investors were trusting of their various deals and arrangements were once they began to unravel one by one, we saw confidence fall to rock bottom. European leaders have a very difficult situation on their hands because once confidence has been lost it can take many years to build up again.
Over the last few months many believe that it is the German authorities which have held back massive bailout funding for the likes of Greece, Portugal, Spain and other countries struggling to survive. In reality this is probably the case because the German government is by far and away the most influential within the Eurozone and because of the underlying strength of the German economy this is only likely to strengthen. There were signs just a few weeks ago that the very tough negotiating stance of the German authorities was softening but Chancellor Merkel is in a very difficult situation because she is under pressure in her homeland, with voters against further German funded bailouts, while needing to react to the European crisis.
While the UK economy continues to struggle, and indeed fell by 0.7% in the second quarter of 2012, it is the plight of Spain which is grabbing the attention of late. The interest rate demanded by investors on Spanish sovereign debt has now risen above the tipping point of 7% at which many people believe a financial bailout is a foregone conclusion. The Spanish government is officially refusing to ask for financial help from European leaders but behind the scenes we have seen rumours of a €300 billion bailout package being discussed with their German counterparts. This would appear to be on the light side, at least in the longer term, as many experts are predicting the Spanish economy will need around €500 billion to get back on a strong footing. It is these rumours and counter rumours which is causing havoc within investment markets and having a massive impact upon confidence.
The constant drip feed of negative and depressing news from the Eurozone will need to end at some stage because we are now approaching the endgame when tough decisions will need to be made with regards to the investment of billions of euros in bailout funding or a dismantling of the euro. Time and time again European leaders have suggested agreements have been reached but so far these have had little or no impact upon investor confidence and investment markets. Make no mistake, time is running out for the euro and the Eurozone!
Since the inception of the euro many people have had their suspicions with regards to the policy of the German government which is by far and away the most influential within the European Union and across the Eurozone. There is a growing belief that the German authorities will now push even harder for a federal Europe which will have central control of local government budgets and effectively dictate spending patterns across the Eurozone and the wider European market.
The reality is that the euro we see today is unlikely to survive in its current form and structure of the European Union and the Eurozone will also need a major overhaul. It seems almost inevitable that we will slowly but surely creep towards a federal Europe despite the fact that many European voters are against this particular action. The UK government refused to adopt the euro and indeed is now outside of the Eurozone but has already committed billions of euros in bailout funding. So, despite the fact that many European Union members are outside of the Eurozone they are still being drawn into the rescue package.
It is almost inconceivable to believe that Eurozone members will in the future have total control of their own budgets if as expected the European Union is forced to guarantee bailout funding in the short to medium term. They will expect major concessions for this extremely expensive strategy and ultimately they will require almost total control of local government budgets. We have seen the beginning of this particular strategy with regards to the Greek government with European Union leaders effectively dictating all spending patterns. Indeed a number of European Union monitors are currently in Greece to see whether the government is in fact abiding by the conditions set down when the bailout funding was agreed.
Canada is a country which has performed extremely well during the ongoing economic climate and is unlikely at this moment in time to dip into a recession. However, Canadian growth may well be stunted in the short to medium term with experts predicting GDP growth of around 2% in 2012 and 2013. This may seem slightly disappointing when compared to recent economic growth but set against the backdrop of the worldwide economic situation it is an impressive performance.
Despite the fact that the Canadian economy is performing better than the vast majority of economies around the world there is still scepticism as to whether the euro crisis will be resolved by the end of 2012. This scepticism is very understandable when you bear in mind the number of false dawns we have seen in recent times and the number of agreements between European Union leaders which have sometimes unravelled within hours of being announced. One positive aspect is the fact that many developed economies around the world are now coming together to invest in the European bailout fund because ultimately each and every developed country in the world has a vested interest in ensuring that the Euro and the European economy do not collapse.
The more developed countries that come together the more confidence this will give investors and hopefully we can slowly but surely drag ourselves out of this mire.
To find out more about the euro crisis and how it will affect you, read the Barclays International guide: Challenges facing the Euro.