EFIC World Risk Developments May 2012: Backlash against euro area austerity
The euro area once again dominates EFIC’s newsletter, World Risk Developments. In the May edition, we look at the backlash against existing policy responses to the area's crisis, especially fiscal austerity.
According to EFIC chief economist Roger Donnelly, ‘The troubled Periphery of the area has been cutting public spending and raising tax rates – severely. And the European Central Bank has extended €1 trillion in cheap three-year loans to banks throughout the zone. Yet GDP continues to stagnate or slump; banks continue to struggle; and public debt/GDP ratios in all the troubled Peripheral countries continue to rise, showing fiscal solvency is getting worse, not better.'
'Even the Core countries of France and Holland find themselves in breach of the EU deficit target of 3% of GDP’.
'Unemployment throughout the euro area is now at 11%, and youth unemployment is around 50% in both Greece and Spain,’ says Donnelly.
'Not surprisingly, voters are angry – and casting round for new politicians with new solutions.’
‘This explains the recent fall of the minority coalition government in Holland, François Hollande’s victory in the French presidential election, and the defeat of the traditional ruling parties in the Greek general election.’
According to Donnelly, ‘The rise of “rejectionists” in these three countries is likely to have several implications for the euro area – some centrifugal, some centripetal’.
As the newsletter explains, the probability of Greece staging a further sovereign debt default and seeking to leave the eurozone has increased, as has the risk of Spain needing to seek an official bailout – like Greece, Ireland, Portugal and Cyprus before it. The probability of confrontation between ‘austerians’ and ‘expansionists’ has also gone up. M Hollande has indicated that he will renegotiate the fiscal compact treaty being urged by Germany. It is likely that he, and other Peripheral countries, will also push for more time to reach their fiscal deficit reduction targets under the compact.
More positively, the austerians have indicated that they are prepared to accept a growth pact running parallel to the fiscal compact to promote growth-oriented adjustment. The traditionally inflation-shy Germany has even said it would be prepared to tolerate more inflation to help troubled Peripheral countries restore international competitiveness and export their way to recovery.
In other stories, the newsletter looks at looming US LNG exports and the challenges they pose for Australian LNG projects … small and mid-sized exporters in a high A$ world … Dubai's economic recovery … and threats to India's investment grade rating.
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