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Eurozone crisis Posts
Perfect Storm brewing in Eurozone
May 23rd, 2009
Anatole Koletsky writes in Monday’s Times about a perfect economic storm brewing. As someone who is very much involved in international business growth, it’s vital to have an ear to the ground as to what is happening economically worldwide. It’s an uncertain time for all of us but those businesses looking to expand internationally need to be careful of one thing – that their ladder is leaning on the right wall before they climb it.
Here’s the basis of Koletsky’s ‘perfect storm’.
Firstly, he argues that Germany is facing an unprecedented economic decline. Last Friday the EU Commission issued data showing that Germany had suffered the worst economic collapse of any industrialised nation since 1945. The German economy has seen a fall over the past 4 quarters which has been acellerating, now showing an annual drop of 6.9% (US is 2.6%, UK, 4.2%). What it shows is that the credit crunch has been far more damaging to Germany and many of its continental partners than in the US and UK. Germany’s export-led economy is struggling to find a market in the current climate.
The second aspect of the ‘perfect storm’ is that certain Eastern European countries have borrowed far too much – up to 20% of their national incomes each year. These have been fuelled by bank loans taken out by consumers, businesses and governments in Euros or Swiss Francs in Austria, Sweden, Italy and Greece. Eastern European countries such as Latvia, Estonia, Hungary and Estonia are already teetering on the brink so if their currencies collapse there will be a tsunami of bankrupties from homeowners and businesses.
The third component of the economic hurricane is the Euro itself. In the first 10 years of the Euro’s existence it provided the stimulus for economic growth in countries such as Denmark, Ireland, Spain, Portugal and Greece. But these countries also ran up massive budget deficits and housing / mortgage booms far in excess of those seen in the US or UK. This growth fuelled exports of luxury cars and consumer goods from Germany and so the wheel turned.
What has happened in the past few months is that the Euro has turned from being a saviour to a threat to these economies. The US and UK have ’sovereign currencies’ (as do many others such as Switzerland, Australia and New Zealand), where we can effectivey ‘print money’ to get out of debt – in extreme cases. Countries in the Eurozone cannot do this.
The risk now is that each of these 3 aspects converge and create a sequence of events could lead to the collapse of much of the Eastern European economy, effective bankruptcy of countries such as Ireland, Greece and Spain, and a plunging economic output across the Eurozone.
Of course this may not happen, but one thing is for sure – where there are signs of economic recovery in the UK, US and other parts of the world, Europe may have a long way to go before coming out of this mess.