Over the last couple of years there is one subject which has dominated the financial press and that is the European debt debacle which has seen economic meltdown across the Eurozone. Some economies have been far harder than others and despite the fact that billions of Euros have already been handed out to troubled economies many believe there is still a lot further to go. We therefore thought it would be interesting to take a look at the views and opinions of expats around the world to see if they believe the Euro crisis can be solved by the end of 2012. The survey, conducted in conjunction with Barclays International, revealed some very interesting answers.
Before looking at the results from the Irish expat community we will first take a look at the Irish economy which was one of the first to receive a European bailout.
The Irish economy
Once the credit crunch began to grab hold of economies around the world we saw many wobbling and Ireland was the first to fall in the Eurozone. The government battled bravely against a European bailout but ultimately due to a collapse in the banking system and the decimation of the property sector this proved impossible. Ultimately the government was forced to take an €85 billion handout from Eurozone leaders and indeed it does look as though we can take some confidence from the movement in the Irish economy since 2010.
It was recently confirmed that economic growth in 2011 within the Irish economy came in at an impressive 1.4% which was actually double initial estimates. This figure has been rubberstamped by Eurozone monitors who have been in Ireland checking to see that the terms and conditions attached to the €85 billion bailout are being fulfilled. It does look as though the Irish government has now got a firm handle on the economy although there is still concern about the banking system and a proposed €64 billion recapitalisation. The reality is that the economic growth in 2011 was impressive but on the ground many people are still struggling, unemployment is far too high and without a recapitalisation and a reorganisation of both the banking system and the property sector, there are further dangers ahead.
When the Irish authorities were forced to accept the European bailout funding we saw investor confidence in the country hit rock bottom. There are signs that more investors are now looking towards Ireland as a potential home for their investment funds in the future although any further short to medium-term recovery may well depend upon a resolution to the European debt debacle.
Now we will take a look at the results from the Irish expat community in relation to the question – will the Euro crisis be solved by the end of 2012?
It may surprise many to learn that there is little confidence that the Euro crisis will be solved by the end of 2012 despite the fact that the European bailout funding has impacted positively upon the overall Irish economy. However, when you consider that the Irish bailout fund totalled just €85 billion against an estimated €500 billion requirement for the Spanish economy, then perhaps this puts it in perspective.
Perhaps one of the only positive developments of recent times has been an improvement in investor confidence with regards to the Irish investment market. This comes despite the fact that the banking industry and the property sector still need a major overhaul but there are signs of progress. It may well be that the rest of Europe is being too pessimistic with regards to the crisis especially when you look at the relative success of the Irish bailout, but there are still major clouds of doubt hanging over Europe.
By far and away the vast majority of Irish expats believe that the Euro crisis will not be solved by the end of 2012. It would be interesting to see when the vast majority of expats believe the problem will be resolved because many experts believe it could be decades before the situation fully filters through the system. The reality is that Ireland went through a dramatic collapse in consumer confidence, business confidence and confidence in the Irish government. Banks fell by the wayside, property prices went into freefall and a number of vital flaws in the Irish economy were exposed to the world. This is the kind of pain which takes some time to get over!
If we try and look at this issue from a balanced point of view, human nature means that in the good times we can get overoptimistic while in the bad times we can get over pessimistic. Some may argue that there is an over pessimistic cloud sweeping over Europe but on the other hand just the merest of glimpses at the financial press would suggest there is perhaps worse to come. The Spanish economy is on the verge of collapse, Italy appears to be not too far behind and even the strong French economy is struggling.
Over the last few days we have seen some signs of hope from European leaders with a suggestion that non-European developed countries are coming together and are now willing to invest in the European bailout fund. We have also seen signs that the German government, which has its hands firmly on the European purse strings, may be softening its stance and there may be some form of long-term agreement on the horizon. This is most certainly the kind of opinion that European leaders would like to harvest because it will eventually impact upon investor confidence and hopefully lead the European economy away from the abyss.
As and when the situation does eventually begin to improve we will likely see a number of people moving from the no camp to the undecided camp and then eventually to the yes camp. This will take some time because investor confidence, consumer confidence and business confidence has been shot to pieces over the last few years and this will need building again from the bottom. So in many ways there is some hope for the future but also European leaders have a lot to answer for because of their previous promises which fell by the wayside.
The European economy
Despite the fact that the Irish economy increased by 1.4% during 2011 many experts believe that the European economy as a whole is officially in a double dip recession or mighty close. Just recently we saw the UK government confirm that the UK economy contracted by 0.7% in the second quarter of 2012 which is a very disappointing performance. Even though some experts believe that 0.5% of this reduction may well be due to the Jubilee celebrations there is no hiding the fact that the UK economy is officially in a double dip recession.
Looking further afield there are very few European countries which are registering positive economic growth and those that have are still struggling with debt problems. The Spanish economy is in freefall, the Italian government is on the verge of collapse and even the French economy, previously one of the strongest in Europe, has flat lined. Indeed it has been left to the German economy to register the strongest performance over the last few years although in reality how long the German government can swim against the tide remains to be seen. Just a few days ago we saw the rating agency Moody’s place German sovereign debt on a negative watch with a potential downgrade of the credit rating in the short to medium term. While this has angered European leaders the reality is that investors are running scared, government budgets are being stretched and we need to see a long-term resolution to the European problem sooner rather than later.
Unemployment is also becoming a massive problem for the European economy and today we saw confirmation that Spanish unemployment is running at just under 25%. This is a disaster for the Spanish government and indeed a variety of other European economies are also reporting very disappointing unemployment figures. In what is becoming something of a self-fulfilling prophecy, the more deterioration in an economy the more investors hold off and the more consumers keep their money in their pockets. This then leads to businesses cutting back on costs with unemployment rising and consumers, again, cutting back because of concerns about their short to medium-term financial stability. Breaking free of this vicious circle will be the key to eventual recovery but we may well have much more downside in the short term before we see any signs of light.
The euro is one of the most controversial currencies of recent times because while European leaders were very buoyant and very confident when it was launched, there were a number of sceptics who believed that it was fatally flawed from day one. Many of these leading economists that were against the euro had their reputations shredded by the worldwide media with the pro-European press adamant that the euro would eventually challenge the US dollar on the worldwide trading stage. How wrong they were!
While the European debt debacle was pre-empted by the US mortgage crisis in 2008 there is no doubt that this financial wobble on a worldwide basis has exposed many flaws in the Eurozone and the make-up of the euro. Leaders are now running scared because investors are dumping euros and the currency recently fell to a low against a basket of developed currencies around the world. At this point in time there are very few positives in relation to the euro and indeed investor confidence has dried up. Some experts believe that only the emergence of a federal Europe with central controls on local government budgets can rescue the euro and the Eurozone from total collapse.
The future of Europe is very much in doubt although opinion is split as to whether we have come too far to see it fail or indeed whether dismantling the Eurozone and the euro is sensible in the longer term. Recently the European Central Bank suggested it would do “whatever was required to save the euro” but this boast was very quickly undermined by the German Bundesbank which indicated a very different stance.
As we touched on above, we seem to take one step forward and two steps back with regards to the European crisis when this week the European Central Bank issued a very positive statement only to be undermined just hours later by the German Bundesbank. We certainly have two very different camps within Europe and Germany certainly has its hands on the European purse strings. Chancellor Merkel is in a very difficult situation at this moment in time because German voters are sick and tired of bailing out their weaker European counterparts while a collapse of the Eurozone and the euro would eventually impact upon the German economy. Chancellor Merkel is most certainly stuck between a rock and a hard place!
It is perhaps the crisis within Spain which has brought the European debt debacle to a head as Spanish sovereign debt is now demanding interest rates in excess of 7%. This is seen by many as a tipping point towards a potential €500 billion bailout despite rumours today that the Spanish government is in secret talks with their German counterparts about a €300 billion bailout. It will be interesting to see whether there is any substance behind these rumours and indeed whether the Spanish government has finally accepted what many believe to be inevitable, the need for significant bailout funding.
Despite the fact that the UK is not part of the Eurozone and has not adopted the euro that has not stopped the UK economy falling by 0.7% in the second quarter of 2012. This is a performance which is likely to be replicated across Europe in the coming months with the European economy heading for a double dip recession which could be deeper than any experienced in recent times. Indeed the UK economy is now weaker than it has been over the last 50 years and there are serious concerns about the short to medium-term outlook.
The future of the Eurozone and the euro depends upon European leaders, and their overseas counterparts, coming together and formulating a long-term rescue package. The German government certainly has its hands on the Eurozone purse strings at this moment in time although if promised assistance from China, India and Australia to name but a few governments does come to fruition then perhaps there is light at the end of the tunnel. The reality is that European leaders cannot resolve this issue without outside assistance and in all honesty each and every other developed country around the world also has a vested interest in the Eurozone and the euro surviving.
If the Eurozone was to collapse this would have a monumental impact upon worldwide money markets which would eventually impact the flow of liquidity to all corners of the world. Businesses would be bled dry, consumers would run for the hills, investors would repatriate their funds and unemployment would go through the roof. We had a taste of a credit crunch in 2008 when the mortgage crisis in the US came to light but this could pale into insignificance in the event of a Eurozone collapse. The reality is that we may well be heading for a federal Europe where European leaders would have total control of member budgets and everything would need to be approved by a Central European body. While governments such as the UK have been dead set against a federal Europe for many years now, is there really any long-term alternative?
It is inconceivable that in the event that the euro and the Eurozone do survive this ongoing debt crisis there will not be major changes and major restructuring of the European situation. The European Union, Eurozone and the euro cannot continue into the future with the structure currently in place today. Major changes will be needed and the sooner the better as far as investors are concerned.
Ireland is perhaps one country which we can look to with confidence in the longer term because it was the first country to receive bailout funding from European leaders. Despite the fact that the €85 billion bailout pales into insignificance against a potential Spanish €500 billion bailout the fact that the Irish economy grew by 1.4% in 2011 does give some hope for optimism. There is still a need to address issues with regards to the Irish banking community and the Irish property market but the government is making headway, confidence is returning and hopefully this progress can be replicated in the years to come.
At this moment in time the vast majority of expats around the world appear resigned to the fact that the euro crisis will last beyond 2012 although when it will eventually be resolved is anybody’s guess. This is a crisis the likes of which has never been seen in living history and ultimately nobody really knows what the long-term impact will be not only on investor confidence but also the financial systems around the world. Flaws have been hopelessly exposed and speculators have certainly made hay while the sun shines although European leaders have not helped themselves after announcing a number of false dawns when agreements appeared to have been reached only to fall by the wayside, sometimes just hours after their announcement.
To find out more about the euro crisis and how it will affect you, read the Barclays International guide: Challenges facing the Euro.