There is no doubt that the ongoing Euro crisis is having an impact across the worldwide economy and there are no countries which have escaped the debacle. This is an issue which has been ongoing for around four years now, from the start of the 2008 US mortgage crisis, and at this moment in time there are very different opinions as to whether it will be solved by the end of 2012 or indeed it could take decades to work through the system.
We therefore decided to run a poll on the expatforum.com to see what US expats think about the crisis and the chances of it being solved by the end of 2012. The survey, conducted in conjunction with Barclays International, revealed some very interesting answers.
The US economy
In years gone by there is no doubt that the US economy was the engine room of the worldwide economy and indeed in many ways dictated not only the direction of the worldwide economy but on many occasions, regional monetary policies. However, over the last few years we have seen a significant shift in the worldwide economy and while the US is still one of the major economies of the world it is now firmly in the sights of China and India.
Even though the US economy does not dominate the press as much as it used to it is worth noting that there have been a number of false dawns regarding a US economic recovery. Indeed there has not been a year gone by since 2008 when optimistic economists have not called the end of the recession only to be thwarted by growing debt and political issues with the US budget. It is safe to say that the US economy is struggling to pull away from recession, it is safe to say that debt in the US has reached record levels and it is also safe to say that political appetite for a financial resolution is very different across each political party.
One issue which is becoming more and more prominent is the fact that the likes of sterling and the US dollar, to name but a few, have become something of a safe haven for various investors across the world. These are two countries which are suffering from an economic downturn but they have also managed their debt issues far better than those across the Eurozone. Unfortunately, this strength in the US dollar has impacted upon exports from the US and indeed a number of fairly bearish comments from the Federal Reserve have not helped the issue. It would take a very brave person to guarantee the short to medium term direction of the US economy but one thing is for sure, if the US does return to recession then this will impact the rest of the world.
We will now take a look at the voting patterns from expats in the US in relation to the question – Will the euro crisis be solved by the end of 2012?
It will come as no surprise to many who follow the international financial markets that only 7.69% of expats in the US believe that the euro crisis will be solved by the end of 2012. This is well below the average for the overall poll which is 13.36% for the yes vote and indicates a growing pessimism for not only the euro but also the US economy. This is slightly concerning when you bear in mind the size and the influence of the US economy and this bearish outlook from US expats is certainly not what the doctor ordered.
In many ways it is underlying investor sentiment which will pull the US out of recession, resolve the euro crisis and put the worldwide economy back on an even footing or else lead us into even darker days. It seems that fewer and fewer expats in the US are confident of a short to medium term resolution – but will those who voted yes help to turnaround this situation?
When you bear in mind that the yes vote from US expats was well below the average for the overall poll it goes without saying that the no vote is well above the average at 76.46%. The relationship between the US and the Eurozone has not always been as straightforward and simple as it could have been because in effect these are two major currencies vying for the worldwide investment arena. However, more and more US expats are pessimistic regarding the short-term future of the euro and indeed there have been murmurings of the potential collapse and disintegration of the currency.
While positive sentiment can bring about change in investment markets there is no doubt that this growing negative sentiment can also drag the situation on for much longer than you would have originally thought. It therefore looks as if we are entering a very difficult period for the worldwide economy with the vast majority of people of the opinion that the euro crisis will not be resolved in the short term.
Not sure (7.69%)
The overwhelming opinion of US expats is that the euro crisis will not be resolved in 2012 and indeed a relatively small number of people are undecided. Time after time we have seen European leaders going to the worldwide press and trying to put on a brave face and a positive attitude to try and influence investor sentiment and take some of the pressure off Eurozone governments. However, while a number of people are unsure as to whether the issue will be resolved in 2012 it seems that the message is not getting across and we are likely to see this issue drag on for some time to come.
There is some uncertainty as to whether the issue can be resolved in a matter of months or a few years or indeed whether it may take decades to filter through the system. With this uncertainty and very different opinions now in the public domain it is perhaps no surprise to learn that some people are unsure of the immediate future of the euro and the Eurozone. Turning around the opinion of the sceptics will not be easy but it is something which European leaders will need to address sooner rather than later.
The European economy
Just this week we learned that the UK economy fell by a further 0.7% in the second quarter of 2012 and is firmly in a double dip recession. Even though the UK is not a member of the Eurozone and has not adopted the euro as its home currency it is still very much at the beck and call of the European economy. Over the last few weeks we have seen the likes of Spain struggle, Italy begin to hit turbulent water and indeed Portugal, Greece and Ireland have already received significant funding. This is now having a major impact upon consumer sentiment and business sentiment across the board and even the German economy is now coming under pressure.
After Spain and Italy there is some concern about the strength of the French economy which is struggling and indeed unemployment across the European Union continues to rise. The situation in Spain is perhaps the most concerning at this moment in time simply because of the funding situation and the fact that unemployment is in excess of 20%. If Spain was to collapse this would have a massive impact upon the overall European economy and there are real worries about whether funding will be available to bailout the Spanish government – some experts are predicting the Spanish economy will require a €500 billion bailout!
It is very difficult to see any positives for the Eurozone economy in the short to medium term because not only is investor sentiment shot but consumer and business sentiment is rock bottom. Each day we see more and more issues in Greece, Italy, Spain and other areas of the Eurozone and there is real concern of contagion spreading across the region. This would be a nightmare scenario for European leaders and could in a worst-case scenario lead to a breakup of the euro and the Eurozone.
The euro has been hitting all-time lows across the board with little or no confidence in this relatively new currency which has dominated the headlines for many months now. Despite concerted efforts by a variety of central banks across the world the ongoing selling of the euro continues and it is difficult to say when this will stop. The situation is dire, many of the doomsday scenarios predicted when the euro was introduced are coming to fruition and even though Germany has loosened the purse strings somewhat over the last few days you would be hard-pressed to find a reason to turn positive on the euro and the Eurozone.
On the plus side there is no doubt that if the euro does manage to ride out the ongoing problems within the Eurozone then it will exit the crisis in a far stronger position than it entered. However, while European leaders continue to put a brave face on these issues there is still ongoing speculation that Greece will in the short to medium term exit the Eurozone and others may follow. The superpowers of Europe are in many ways looking to close ranks and the likes of Germany, France and to a lesser extent the UK will dominate policy going forward.
There is intense speculation that Germany is looking towards a federal Europe with the European Union having the final say on local government budgets, something which the UK government is very much against. However, a number of experts believe that this has to be the way forward in the short to medium term in order to protect and rescue the euro. But will this massive change actually go through?
Over the last few days we have seen the interest rate on Spanish sovereign debt rise to record levels of well over 7%. Historically the 7% level has been untenable going forward and has in recent times led to significant bailout funding for the likes of Ireland, Greece, etc. The Spanish banks have already received in excess of €100 billion and there is now growing concern that the local Spanish governments are struggling to make ends meet and the pressure is now falling upon the federal Spanish authorities.
Elsewhere we have seen the likes of the International Monetary Fund working with a variety of other international organisations to put together various bailout funds. China, India, Australia, Brazil, Russia and a variety of other relatively strong economic countries are putting forward billions of euros to fund the ongoing bailout. The reality is that all of these parties will have more of a say with regards to international trade in the future although they do have a vested interest in saving the euro and the Eurozone. It is common knowledge that if the euro and the Eurozone were to collapse then this could, and most likely would, lead to credit crunch part two with worldwide money markets grinding to a halt.
The reality is that the major economies of the world will do whatever it takes to ensure that the euro and the Eurozone at least live to fight another day although there may be major changes in the medium to longer term to ensure this situation is not repeated in the future. Even if the short term life of the euro is to be extended then investors will need to see major restructuring of the currency and Europe as a whole to encourage more confidence in the longer term. At this moment in time European leaders have lost control somewhat and the investment markets are effectively the tail wagging the dog which is the Eurozone and the euro.
Investors have been targeting specific economies and specific countries for some time now trying to expose weaknesses and cash in on the downside. While this does seem very much at odds with the principle of global investment the reality is that if weaknesses were not present across the Eurozone and various economies then there would be nothing to expose. The euro and the Eurozone are going through a very tough test at this moment in time and it is difficult to see what the final outcome will be.
It would take a very brave person to dictate with great clarity what the future of the euro and the Eurozone will be in the short to medium term. Each day seems to bring new issues and every time we seem to have an agreement between European leaders there are problems and issues and various agreements in the past have very quickly unravelled. Historically relatively cheap talk by European leaders has been enough to control investor sentiment but at this moment in time this cheap talk means nothing and it is time for actions rather than words.
Time and time again we have heard about groundbreaking arrangements between the various European leaders although ultimately it is Germany which is pulling the purse strings. There have been signs of a slackening of the purse strings by Chancellor Merkel but she is very much on the back foot in Germany with political opinion and voter sentiment against funding yet more European bailouts. So on one hand we have Chancellor Merkel determined to save the euro and the Eurozone while on the other she is fighting for her political life back home. This is in effect a no-win situation for Chancellor Merkel and while we may look back in years to come and see her as the saviour of the euro and the Eurozone this may not be the lasting opinion of her amongst German voters.
Despite the fact that we have seen a number of positive headlines regarding the euro crisis over the last few weeks it is the action of European leaders which will turn markets not various comments across the press. During the early days of the European crisis investment markets were turned by comments from European leaders but after a number of false dawns this strategy has been blown out of the water. Time after time we have been promised groundbreaking agreements between European leaders only for these to unravel and unwind relatively quickly. What next?
There is no doubt that the future of the euro and the Eurozone as it stands at the moment is very much in doubt. There is no doubt that very different opinions are present amongst European leaders and each one seems to have their own agenda. The Spanish authorities are adamant they do not require a bailout but investment markets are saying they do and European leaders are becoming more and more concerned about the potential €500 billion package. The collapse of the Spanish economy would dwarf all bailout packages over the last few years and take the European crisis to a new level.
At this moment in time investor sentiment is certainly against a quick solution to the euro crisis with very few people believing we will see a resolution before the end of 2012. Indeed many experts believe it may take decades for this issue to filter through the system and for Europe and the Eurozone to return to “normal”. Investor sentiment will play a major part in any eventual recovery and close monitoring of investment markets should indicate any potential upward or downward turn in sentiment.
To find out more about the euro crisis and how it will affect you, read the Barclays International guide: Challenges facing the Euro.