If there is one country that has been in the headlines of late it has to be Spain with an economy spiralling out of control, unemployment rising and a government fighting calls for an economic bailout. The interest rate on Spanish sovereign debt has increased to more than 7% and there are serious concerns about the ability of the Spanish government to refinance debts in the short term. Against this backdrop we thought it would be interesting to see what Spanish expats think of the European crisis and indeed whether it will be resolved in 2012. The survey, conducted in conjunction with Barclays International, revealed some very interesting answers.
However, before we take a look at the results of the online poll from Spanish expats let’s take a look at the Spanish economy and the problems faced.
The Spanish economy
The Spanish economy fell by 0.4% in the second quarter of 2012 and indeed there is little chance of any significant recovery in the immediate future. Indeed the authorities are still forecasting a 0.5% reduction in the size of the economy in 2013 which is fairly understandable when you consider the problems being faced. One of the major issues hitting the headlines of late has been the ever increasing interest rate on Spanish sovereign debt which has effectively been disowned by international investors. The rate is now at over 7% with experts believing it is almost inevitable that the economy will require a bailout in the short to medium term.
There have been some interesting developments over the last few days with the European Central Bank suggesting that everything will be done to save the Euro amid rumours that the Spanish government has already requested a €300 billion bailout from the German authorities. The rumoured talks with the German authorities have been denied although many experts believe there is no smoke without fire and things are going on behind the scenes. The reality is that the Spanish government is very quickly running out of options and despite a stubborn strategy of not asking for help this cannot last forever.
Today it was revealed that Spanish unemployment is now running at nearly 25% and many of the local Spanish governments are struggling to meet their financial liabilities. This is placing more and more pressure upon the federal Spanish government amid signs that the balance sheet for Spain is creaking and investors are reluctant to lend cash in the short to medium term. In many ways Spain has been impacted by the property crisis sweeping across Europe because many of the leading Spanish local governments depend upon tourism and international investment.
We will now take a look at the results from Spanish expats with regards to the question – will the Euro crisis be solved by the end of 2012?
It is no surprise to learn that Spanish confidence in the Eurozone and Europe as a whole is now at rock bottom with just 3.33% of those taking part in the vote believing that the issue will be resolved by the end of 2012. The doom and gloom which is currently descending upon Spain is having a major impact upon the Spanish population and indeed there have been ongoing fights between the authorities and the ever more desperate population. People are literally struggling to survive and the Spanish government continues to announce more and more austerity measures which make the situation more difficult in the short term.
It is interesting to see that even anybody believes that the European situation will be resolved in 2012 because some of the financial bailout figures being suggested are enormous. The reality is that many European governments, assuming that bailout funding is forthcoming, will be paying back this debt for many decades to come and this will be a drag on economic growth. Unless European leaders can pull a major rabbit out of the hat the yes vote is likely to remain one of the more scarce opinions in our online poll!
It is no surprise to learn that 90% of the Spanish expat community, who are currently experiencing the economic downturn and financial difficulties, believe that the European issue will not be resolved by the end of 2012. The Spanish government is coming under pressure from all sides and indeed this is placing more and more pressure upon the European Union, Eurozone and the Euro. Many people are now openly questioning whether Spain should be part of European Union and indeed whether we are on the almost inevitable path towards a federal Europe with more integration and central controls.
Spain is by far and away the largest economy in Europe to have hit the buffers of late and despite rumours of a potential €300 billion bailout package from the German authorities, many believe that the final figure will be somewhere nearer €500 billion. The economy, unemployment figures, national debt and problems across the whole Spanish population have created something of a nightmare scenario for the authorities. It is difficult to see any short-term relief even in the event of bailout funding which will have a series of very strict conditions attached.
In the doom and gloom of the Spanish economic downturn it seems there are some people who are undecided as to whether the issue will be resolved by the end of 2012. Whether this is blind faith or blind optimism is open to debate but the reality is that at this point in time it is difficult to see how the crisis can be boxed off during 2012. Contagion has already spread towards Italy with many speculators having the Italian government and the Italian economy in their sights. The unfortunate reality is that the ongoing crisis is exposing major weaknesses in the structure of Europe and the Euro as a whole.
Perhaps one of the more positive aspects which has been discussed of late is the likelihood that in the event that the Euro and the Eurozone do survive the ongoing crisis they should exit the crisis under a different structure and potentially stronger. However, there is still a long way to go before this kind of resolution can be delivered.
The European economy
The European economy as a whole is under enormous pressure at this point in time and while the Spanish economy contracted by 0.4% in the second quarter of 2012 this figure was dwarfed by the 0.7% fall in the UK economy. Despite the fact that the UK is not part of the Eurozone and has refused to adopt the euro it is still being impacted by the ongoing European crisis as are many other elements of the European Union. We are likely to see some far worse figures than that delivered by the UK authorities with many economies now looking over the edge of a precipice.
The ongoing contraction of the overall European economy is having a major impact upon the Euro which is now hitting record lows against a variety of leading currencies. They were many experts who believed that the Eurozone and the euro itself were flawed projects but these dissenting voices were drowned out by optimistic voices. The reality today is that more and more European economies will eventually require some kind of financial assistance to avert Armageddon and it will take many years for these debts to be repaid causing a significant drag on economic growth. Slowly but surely economic forecasts for the short to medium term are being lowered on a regular basis and indeed nobody is quite sure when we will hit the bottom. We have seen some encouraging comments from various European leaders but in reality the time has come for actions rather than words as investors continue to lose faith.
If the Spanish economy was to collapse then next in line would be Italy and potentially France with only Germany holding up the European economy at this moment in time. The German government very much has its hands on the European purse strings and is calling the shots at this moment in time. It is difficult to see any rescue package unless the authorities are able to loosen German hands around the purse strings.
The euro was launched in a blaze of glory as a potential competitor to the ever strengthening US dollar which is the currency of trade around the world. Despite the fact that many leading economists were suggesting from day one that the project was flawed they were often ridiculed and their reputations dismantled in the worldwide media. However, if you look at the euro today and the potential in the short to medium term, who was right?
The sad fact is that integration of the European Union and the adoption of the euro has been exposed as potentially flawed. Weaknesses are appearing on a regular basis and speculators certainly have the upper hand at this point in time. The tail is very much wagging the dog as European leaders continue to roll out their ever more confident statements which are having no impact upon investment markets. The time has come for action rather than words because many investors are losing complete faith with European leaders who continue to announce false dawns on a regular basis.
Perhaps the only potential light at the end of the tunnel for the euro is the fact that if it was to survive this ongoing crisis then it should exit the crisis under a differently structured Europe and should be stronger in theory. However, whether or not this will happen and when it may happen are very difficult questions at this moment in time. Make no bones about it, the euro is in trouble and the European Union is looking over the edge of the precipice!
One of the main problems which investors have commented upon time and time again is the fact that many of the negotiations between the European Union and individual governments are happening behind the scenes with very little in the way fact available. This is causing something of an information vacuum where rumours and counter rumours can and do move markets and are having a major impact upon investor sentiment and investor confidence. Only today we saw the leader of the European Central Bank stepping forward to suggest that he would do “whatever is needed to protect the euro” only to be slapped down by the German authorities who undermined his comments.
The reality is that enormous funding is required to bailout the Spanish economy with potential problems still existing in Italy, France and other economies. There has been more talk of a federal Europe where control of budgets and government spending would be more controlled but this has the potential to cause major problems with voters across Europe. Time and time again governments such as the UK have expressed their reluctance to become involved in a federal Europe where the setting of local government budgets would be taken out of the hands of the elected politicians. However, at this moment in time some experts believe that only a federal Europe with central controls can give back confidence to the investment markets which are central to this ongoing issue.
Many people believe that the German government is currently the crux of the problem with regards to bailout funding for the likes of Spain, etc with Chancellor Merkel stuck between a rock and a hard place. Unofficially she seems keen to relax the European purse strings and provide funding for the likes of Spain but she is under pressure from German voters who do not see why they should be forced to bailout weaker European governments time after time. The reality is that the German authorities are now in control of Europe and have their hands firmly around the purse strings. Their influence and their power will only grow in the medium to longer term and former powerful allies such as Spain and France may be forced to dumb down to their German counterparts.
We are now reaching a critical point in the future of the euro and the Eurozone and we may see a more rapid response to ongoing issues. Time really is of the essence!
It is difficult to predict the future of the euro and the Eurozone with any real confidence because of the ongoing financial difficulties being felt by governments around Europe. On one hand a number of experts believe that the euro is fatally flawed and could eventually collapse while on the other hand other experts believe that a federal Europe with central controls is the only way forward. The reality is that the structure as it stands at the moment is not working and unless there is a major restructuring of the relationship between European leaders it is difficult to see a prosperous future.
Over recent days we have seen comments from the likes of the IMF and the ECB with regards to additional funding for bailout packages but for every positive announcement we see there seems to be somebody behind-the-scenes undermining this. All of the parties involved really do need to pull together, pull in the same direction and make full use of the various investment proposals on offer from governments around the world. We have seen the likes of China, India and Australia to a lesser extent stepping forward with additional funding, not to mention their South American counterparts, because they all have a vested interest in saving the European economy. Whether or not they will use their influence to improve their position in the worldwide trading food chain remains to be seen.
All in all we are slowly but surely moving towards the end game with the future of the euro and the Eurozone central to the plot. Will the euro survive or will it be dismantled and cast aside?
Over the last few days we have seen some more positive comments regarding the European Union and additional bailout funding but the reality is that without a concerted effort amongst European leaders and non-European leaders there is little hope of success. The German government seems undecided as to whether to loosen its grip of the European purse strings with Chancellor Merkel very much stuck between a rock and a hard place.
The fact that the interest rate on Spanish sovereign debt has risen above the critical 7% level is a major concern amid worries that the Spanish economy will require a €500 billion bailout package despite rumours of a €300 billion package currently being discussed with German leaders. We are now approaching the end game and it will literally be make or break for the European Union and the euro over the next 12 months or so. We have seen a number of false dawns and many investors are now discounting comments from various European leaders and concentrating upon actions rather than words. The days when a few comments from influential European leaders could move investment markets have gone for now with sentiment amongst European investors now at rock bottom. The fight to save the euro began some time ago although we are now getting towards the end of the last round with a positive result still possible but with much work still to do.
To find out more about the euro crisis and how it will affect you, read the Barclays International guide: Challenges facing the Euro.