Over the last few months it has become apparent that the European crisis is deepening and there are serious concerns around the world as to when European leaders will be able to put the economy on a more stable footing. We therefore thought it would be interesting to ask visitors to the expatforum.com whether they think that the European crisis will be resolved by the end of 2012 or whether the deep-seated issues will take longer to fix. The survey, conducted in conjunction with Barclays International, revealed some very interesting answers.
Before we take a look at the results of the online poll we will now take a look at the Indian economy and the prospects for the region.
The Indian economy
The Indian economy, together with the likes of China and Australia, is one of the very few beacons around the world as economies continue to topple and the financial crisis continues to create more questions than answers. Even though the Indian economy is beginning to slow a little from earlier growth rates, it is still expected to grow by around 6% this year which is a phenomenal performance when you compare this to the double-dip recession which many European economies are currently experiencing.
Even though the Indian economy is showing significant growth even during the current economic downturn around the globe there are a number of issues for the Indian authorities to tackle. Inflation is significantly higher than the authorities are comfortable with, growth is beginning to slow and there is limited scope for further interest rate reductions without feeding the monster that is inflation. However, there are also other options available as the authorities can loosen regulations with regards to overseas investment as they have been very protective of local markets in years gone by.
Other issues which are very prominent within the Indian economic and political scenes include the need for major reform, social unrest in some areas of the country, extreme poverty in some of the far-flung villages and towns as well as a need to control the cost of energy in India which is set to double by 2031. There is no doubt that the Indian authorities certainly have their hands full but investors around the world appear confident that they can resolve any issues and continue the ongoing growth path which the economy has been on for some time. Many experts believe that India will become one of the economic powerhouses of the future and indeed at the rate it is growing this is not inconceivable.
We will now take a look at the online poll where we asked the question, will the euro crisis be solved by the end of 2012?
India is head and shoulders above any other country involved in our online poll in relation to the confidence amongst investors and expats that the euro crisis will be solved by the end of 2012. Indeed the 37.21% share of the vote is identical to the no vote which will surprise many people. There is no apparent reason why there is so much confidence within the expat community in India although it may have something to do with the feel good factor associated with the local economy and prospects for the future?
While there is no doubt that regional media variations can have a major influence upon investor confidence both locally and internationally it is surprising to see that Indian expats are so confident. The argument has also strengthened when you bear in mind the variation in the expat community as India continues to attract people from all around the world. You have to say that this is likely to continue if the economy remains strong because even though we have seen significant growth many believe that this is just the start of India’s move up the economic ladder.
As we touched on above, it is a dead heat between the yes vote and the no vote with regards to whether the European issue will be resolved by the end of 2012. It is easier to find reasons for the no vote than it is for the yes vote because stock markets around the world have been impacted, overall global economic growth has slowed and investors have in many cases repatriated money or are looking towards safe havens such as India, China and Australia to a certain extent. When you also take into account the fact that many experts are predicting that the European issue will take decades to filter through the system it is no surprise to learn that some investors are pessimistic.
We have seen a number of false dawns from European leaders as decisions and deals in the past have materialised only to fall apart within hours. Therefore, despite the likes of Chancellor Merkel suggesting a deal has been done with regards to a bailout of various European economies we need to see the colour of her money before turning positive. This may sound harsh, this may sound tough but in many ways European leaders have brought this upon themselves.
When you take into account the number of people who voted yes for a resolution by the end of 2012 and those who are undecided, this is by far and away the largest majority at around 62%. There is no doubt that India is the only country in our online poll where the number of yes votes and undecided votes are greater than the number of no votes. It is very easy to see why some expats are undecided with regards to prospects for the Euro during 2012 because the media seems to take a very positive stance some days and a very negative stance on other days. Against this background is any surprise that people are confused?
It is also worth mentioning that the current crisis is like nothing we have ever seen before with the potential for a new currency to be dismantled and a return to former local currencies. This is something which has never occurred in the world before and something which is unlikely to occur in the future. The cost of dismantling not only the euro currency but also the European economy as a whole and the knock-on effect this will have to worldwide investment markets and money markets is insurmountable.
The European economy
When you bear in mind that Spain currently has in excess of 20% unemployment, a creaking federal government balance sheet and has seen sovereign debt interest rates top 7% this perfectly reflects the challenging situation within Europe. One by one all of the major European Union economies have slipped into recession, or to be correct a double-dip recession, with the exception of Germany and France which are battling to maintain positive growth in the short term. Even Germany is struggling and recently we saw the credit rating agency Moody’s place the rating of German sovereign debt on a negative watch.
In years gone by local governments would have been able to revalue their currencies in the face of challenging economic environments but with the euro in use across the whole Eurozone, taking in a number of economies, this is impossible. Therefore, European leaders have been forced to put together an economic package which they believe will support struggling economies and eventually lead to a firmer footing in the future. However, at this moment in time there is no reason to believe that the European economy will suddenly move back into positive territory and indeed just yesterday we saw the UK economy fall by a whopping 0.7% in the second quarter of 2012. Unfortunately these economic shocks are likely to be replicated across the board and it seems as though the situation could get very much worse before it starts to recover.
We are also in a very unique situation where many investors are ignoring the comments of the various credit rating agencies who have in the past dictated investment sentiment with regards to sovereign debt. Indeed future credit rating downgrades have already been discounted in the minds of many investors leaving the potential for limited further disappointment.
The euro was put forward by European Union leaders as a potential challenger to the ever popular US dollar and indeed a number of economists connected with this policy. However, it is also worth noting that a number of prominent economist also suggested that the idea of a European currency was flawed from day one because of very different budget requirements, debt profiles and economic growth. Unfortunately for investors today, the vast majority of these negative noises were drowned out and many of the economists were ridiculed and their reputations shredded. But who was right in the end?
The ongoing Spanish debt issue, which is now reaching a critical point, has placed yet more pressure upon the euro and indeed the currency fell to historic lows against a basket of major worldwide currencies. At this moment in time it seems as though the euro is in freefall and there are real concerns that the currency may not survive the crisis. However, one other train of thought is the fact that European leaders have come so far that they cannot afford the euro to collapse and will do whatever it takes to maintain it in some shape or form.
Over the years central banks have used interest rates as their first tool of choice with regards to economic controls but with European Central Bank interest rates as near to 0% as possible this tool is effectively blunt. Therefore, the short to medium-term prospects for the euro lay fair and squarely in tandem with European economic growth which is currently very disappointing indeed. With no ability to devalue the currency, and stimulate economic growth, there is a growing feeling of pessimism for the short to medium term future of the currency.
Over the last few days we have seen a number of issues come to the fore and it has to be said that the vast majority of these are not positive with regards to the short to medium term outlook for the European economy. Spanish sovereign debt yields have now climbed above the critical 7% level at which experts believe a bailout is almost inevitable, the UK government is reeling from a 0.7% reduction in the economy and despite giving the Greek authorities numerous chances to bring their finances back into line it seems that their austerity measures do not go as far as European leaders had demanded. All in all, there is much for European leaders to discuss and there are more questions than answers at this moment in time.
One of the more recent plus points was the softening of the tough stance taken by German Chancellor Merkel who is under pressure from German voters to limit the countries investment in any future bailout operations. In many ways Chancellor Merkel is in a no-win situation because she is damned if he does and she is damned if she doesn’t. It is also more evident today than ever that Germany is literally dictating the economic policy of Europe and holding the purse strings for any future bailout packages. The German position has been weakened slightly by the change in French government with an about turn with regards to austerity measures and future debt reduction plans.
Perhaps one of the major developments of recent times is the decision by the likes of China, India and Australia to become greater involved in these bailout packages in tandem with the IMF. The reality is that these countries are still experiencing economic growth and as well as protecting their own interest, via a bailout of Europe, they are also likely to use this issue to further strengthen their own trading positions in the longer term. If we do see a concerted effort by developed countries around the world to save the euro and the Eurozone then perhaps we may be able to bring it back from the abyss and put it on a much sounder footing. However, there is still a long way to go and there are still many hurdles to overcome.
In this moment in time the future of the euro and the Eurozone as it stands is very much in doubt with opinion split between survival and breakup. There are very strong arguments for each potential outcome and the reality is that nobody alive today has been in this situation before therefore we do not really know what to expect in the event of a breakup of the Eurozone and a collapse of the euro. We have seen many scare stories in relation to the European Union and the fact is that behind-the-scenes many appear to have been planning a federal Europe for some time and could get their way as a condition of saving the euro and the Eurozone.
The currency continues to fall on investment markets having hit a low against a basket of major currencies. The situation within Europe is deteriorating quicker than many had expected and economic growth is but a pipe dream for the vast majority of European countries. The credit rating agencies are likely to reduce their rating on sovereign debts around Europe but in many ways investors have already discounted a worst case scenario from the credit rating agencies.
In many ways we need to look back to the early days of the euro and the scepticism among some experts to see what the problems may be in the future. There is a growing feeling that anything short of a federal Europe could leave the euro and the Eurozone wide open to further speculative attacks in the future because countries are running their own budgets with their own interests in mind. The euro, the Eurozone and a federal Europe can only survive if all parties abide by the same guidelines and the same rules and there is central control.
The situation facing us today is like nothing ever seen before with a potential new currency on the verge of collapse, the Eurozone economy struggling to survive and massive financial bailouts required to stabilise some of the more rocky economies within Europe. The euro continues to fall to record lows against a basket of worldwide currencies and indeed at this point in time it is very hard to make a positive case for the euro. Markets are growing ever more sceptical of European leader promises and we are literally at the stage where actions speak louder than words and many positive comments and “noise” is now being discounted by investment markets.
Whether or not the ongoing rush towards a federal Europe blinded many European leaders to the potential problems of a single currency and the single market is debatable but there were warning signs in the early days which were seemingly ignored. It did take the US mortgage crisis to expose these weaknesses across the Eurozone but now that they have been exposed contagion is the major problem today. Each and every European economy is now being tarred with the same brush and one by one the dominoes are being knocked down by speculative investors. Until we see a significant fight back by European leaders it seems as though the speculators will have the upper hand for the foreseeable future.
To find out more about the euro crisis and how it will affect you, read the Barclays International guide: Challenges facing the Euro.