Will the Euro crisis be solved by the end of 2012?

Vast majority of expats do not think the euro crisis will be solved this year

We thought it would be interesting to take a look at the opinions of expats around the world with regards to the Euro crisis and whether any thought it would be possible to solve the problem by the end of 2012. There were some interesting voting patterns in this online poll at the expatforum.com which we will now take a look at in more detail. We need to remember that this is a crisis which is impacting the worldwide economy, every developed nation around the world and indeed at this moment in time there is no certainty as to when the troubles will end. The survey, conducted in conjunction with Barclays International, revealed some very interesting answers.

First of all let us will take a look at the worldwide economy and how this has been impacted by the Euro crisis.

The worldwide economy

Since the US mortgage crisis back in 2008 we seem to have gone from one disaster to another with regards to the worldwide economy and indeed Europe itself is headed for a double dip recession with the worldwide economy not too far behind. There is no doubt that credit crunch part one, which occurred in 2008/09, had a major impact upon money markets around the world despite the fact that initially the problem was centred around the US mortgage arena and to a lesser extent European banks which have been increasing their exposure to the region. So how has the worldwide economy changed over the last few years?

Historically the US economy has been the engine room of the worldwide economy although recent statistics show that the US economy is struggling to pull away from a double dip recession. Indeed there is speculation today that the Federal Reserve will be forced to introduce a third bout of quantitative easing which will hopefully inject confidence into the US economy in the short term but may well create a drag on economic growth in the medium to longer term. This weakness in the US economy has allowed the likes of China and India to step up to the mark as well as other BRICS to a lesser extent.

Indeed a number of experts believe that the likes of China, India, Brazil, etc will very soon be challenging the US at the top of the economic leader board as we start to see a shift in worldwide economic power. That is not to say that the US is going to fall by the wayside, far from it, but the performance of the likes of China, India and Brazil during these very difficult economic times has been very impressive to say the least and has attracted the attention of worldwide investors.

We will now take a look at the individual votes in response to the question, will the Euro crisis be solved by the end of 2012.

Yes (13.36%)

When you bear in mind the very downbeat and very negative press comment the European economy is attracting at this moment in time it may even surprise some people to learn that 13.36% of those who voted in our online poll believe that the Euro crisis can be solved by the end of 2012. Interestingly it seems that the most optimistic of expats are located in India, the UAE and Canada and the fact that they are far removed from the European Union and the European market itself is perhaps one reason why there have been able to take a very different opinion and a very different stance than their European counterparts.

The likelihood is that the Euro crisis will not be solved by the end of 2012 but the reality is that nobody alive today has experienced anything like the European debt debacle and even the credit crunch part one from 2008/09. It may just take one positive tweak by European leaders to allow investor confidence to come rushing back but at this moment in time this seems very unlikely.

No (76.46%)

It will come as no surprise to learn that the vast majority of those who were involved in our online poll believe that the crisis will not be solved by the end of 2012. Indeed, if you look at the worldwide press and the comments from various experts it is difficult to see whether the crisis will be resolved in the next decade never mind the next six months. The most pessimistic of expats appear to be living in France, Australia and the UK and when you bear in mind that the UK government recently announced a 0.7% contraction of the UK economy in the second quarter of 2012, we can truly understand the scepticism.

Time after time European leaders have stepped forward with “groundbreaking agreements” only for them to break up sometimes within hours of their announcement. The reality is that the German government very much has its hands on the purse strings of Europe and until governments in need of funding agree to massive austerity measures we are at something of a stalemate. While concerns were raised when finance was forwarded to the likes of Ireland, Portugal and Greece, the €500 billion bailout package, which many experts believe Spain will require, will dwarf all of these previous arrangements.

Undecided (10.18%)

There seem to be a number of people undecided as to whether the Euro crisis can in fact be solved by the end of 2012 with perhaps more optimism shown in India, Ireland and the UAE than any other of the countries involved in our online poll. There are two sides to the European story because on one hand the European leaders need to inject more confidence into the investment markets, via upbeat comments and forecasts, while on the other hand many experts are being practical and crunching numbers to arrive at some very shocking results.

We’ve also seen the likes of the ECB and indeed France and Germany stepping forward to suggest that they will do whatever it takes to save the Euro and the Eurozone. These are very confident words although at this moment in time they need to be followed up by actions before investors lose confidence yet again. Over the last few days we have seen stock markets remain fairly volatile although there was a sharp upturn towards the end of the week as investors began to favour a concerted effort between various financial institutions around the world and other developed countries. Whether this arrangement actually falls into place in the short term remains to be seen but the fact is that time is running out and the Eurozone and Euro are most certainly in the last chance saloon.

The European economy

The European economy has obviously taken a major nosedive over the last couple of years and at this moment in time there seems little hope for any immediate turnabout. The UK government recently announced a contraction of 0.7% in the UK economy during the second quarter of 2012 which is a disastrous results and the worst quarterly reduction for over 50 years. While the UK is not part of the Euro or the Eurozone it is still very much a central part of Europe and this economic downfall will be replicated across other European countries.

At this moment in time it seems as though the likes of Germany, and France to a lesser extent, are holding up the European economy with others falling by the wayside. Greece has fallen out of contention and has been consigned to the junk bond bin while Spain has seen a major deterioration over the last few months and unemployment is now approaching 25%. Spain is the major worry in the short to medium term because potentially it may well require a €500 billion bailout package – on top of the €100 billion banking package already in place.

There are rumours that the Spanish government has been in talks with German counterparts about a bailout package buy these have been refuted in public although there is no smoke without fire. The French economy has also flat lined and is likely to fall into recession in the second half of 2012 and even the relatively strong German economy is struggling to survive. A recent reduction of German sovereign debt ratings by the credit rating agency Moody’s prompted an angry response from German leaders but the reality is that many investors are discounting credit rating movements at this moment in time because they have far bigger issues on the horizon.

The euro

The euro was presented as the potential competitor to the US dollar with regards to worldwide trade and initially the response was very positive from money markets around the globe. However, now that the euro is in serious trouble it is worthwhile looking back on the initial launch and the flurry of experienced economists who believed that the project itself was flawed from day one. Many of these prominent economists were ridiculed in the pro-European press and indeed many of their reputations were dismantled in front of their very eyes. But who is right today?

As the European economy as a whole continues to contract we have seen investors selling euros to near record lows against a basket of prominent worldwide currencies. This constant drip feed of negative comment and negative news is having a major impact upon investor confidence and at this point in time the euro is friendless. The European Central Bank has reduced interest rates to near rock bottom and there is little scope for further reductions in the short to medium term. Historically the interest rate tool was a very powerful instrument when fighting economic turmoil but we are now looking towards quantitative easing and major injections of liquidity into the money markets.

It is difficult to see at this moment in time when the turning point for the euro will occur and indeed whether the euro will survive in its current form beyond the next few years. Some believe that this flawed currency could well be dismantled in the short to medium term while others believe we have come too far down the line to turnaround today. On balance we have probably come too far down the line to dismantle the euro although a major capital injection will be needed to save the currency and the Eurozone.

Recent developments

Over the last few weeks we have seen a number of false dawns and a number of agreements which have unravelled and been dismantled sometimes within just hours of being announced. This has had a major impact upon investor confidence although on a more positive note the ECB recently suggested it would “do whatever was required to save the euro” which was well received by some investors. On a slightly negative note, the Bundesbank followed up this announcement with a suggestion that Germany would not be in favour of throwing good money after bad unless there was major change within the structure of Europe and the Eurozone.

Perhaps the most positive note of recent times has been the introduction of countries such as China, Australia, Brazil and other more prosperous countries that are now willing and certainly able to inject funding into any future European bailout packages. Even though these countries are still showing economic growth they do have a vested interested in protecting the euro and the Eurozone because of the impact this will have on not only the worldwide economy but money markets around the globe. There is also a chance for these countries to increase their profiles on the worldwide stage and indeed increase their influence across-the-board.

In many ways Germany is still top of the tree with regards to the powerbrokers in Europe and indeed while Chancellor Merkel had appeared keen to soften her stance with regards to additional funding she is under pressure from German voters who do not see why they should be forced to bail out weaker European counterparts. It seems highly likely that we will arrive at an agreement in the short to medium term which could potentially lead to a federal Europe and central control of member state budgets. This is something which the UK government has been dead set against for many years now although in reality we need to see the collective power of the Eurozone and the European Union used in a more positive manner to support the euro and weakened economies.

The future

As we touched on above, many people believe that we are now moving slowly but surely towards a federal Europe which will have central control of member state budgets. There has already been a suggestion that all member state budgets will need to be rubberstamped by the European Union in the future although some countries are still fighting this matter. The reality is that we will need to see a collective bailout fund in the short term which will likely include a vast array of non-European countries. This could in due course take away some power from the European Union and the European economy because the likes of China, India, Brazil, etc will not invest billions of euros without something in return.

Many experts were suspicious of the initial euro project and saw this as the first step towards a federal Europe which would be dominated and controlled by Germany. These concerns were initially dismissed as speculation but the reality is that such is the divergences in economic performance across the Eurozone and the divergence in member state budgets that some form of central control will be required. Indeed there have also been accusations of massaging of financial figures to ensure that certain member states were able to join the euro and the Eurozone. If the US mortgage crisis of 2008 had not occurred then we would probably not be in the situation we are today but the ongoing financial crisis has hopelessly exposed major flaws within the structure of Europe and the Eurozone.

Conclusion

While there were some very different voting patterns across-the-board it will come as no surprise to learn that the vast majority of those who took part in our online poll believe that the euro crisis will not be solved by the end of 2012. As Spain hangs perilously on the edge of the abyss, with Spanish sovereign debt interest rates now well over 7%, and Italy seems to be wobbling we can only estimate the amount of funding which will be required in the short to medium term. Indeed while we asked the question as to whether the Eurozone issue would be solved by the end of 2012, many experts believe it may take decades for the issue to filter through the system.

At this moment in time there is doom and gloom everywhere we look although recently the European Central Bank suggested it would do “whatever was needed to protect the euro” although there seems to be some friction between the ECB and the German authorities. This backbiting and infighting within Europe needs to stop and all parties need to pull together for the benefit of the Eurozone, Europe and the worldwide money markets. Nobody alive today has experienced anything anywhere near the issues of today and quite frankly nobody quite knows how long they will last and what impact they will have in the short, medium and longer term.

We really are on the edge of a precipice and unless all of the relevant parties are able to pull together we could be on the verge of that doomsday scenario which many economists predicted when the euro was first launched.

To find out more about the euro crisis and how it will affect you, read the Barclays International guide: Challenges facing the Euro.