EU’s Debt Heavy Economies At Crossroads, 2014 Approaches

Posted by: : Paul EbelingPosted on: December 20, 2013 EU's Debt Heavy Economies At Crossroads, 2014 Approaches

EU’s Debt Heavy Economies At Crossroads, 2014 Approaches

Facing what some economists say could be a “lost decade”, the fate of the EU’s most debt ridden countries could depend on the steps governments take in the coming year.

The recent economic signals coming from Greece, Ireland, Italy, Portugal, and Spain (PIIGS) are mixed.

All the countries except Spain have Debt to GDP ratios of at least 100%, according to statistics from the World Bank (WB), making them subject to refinancing debt on fickle markets.

They all suffer from hig debt, slow growth, high unemployment levels, and cautious banking sectors.

Ireland appears to be the healthiest of the PIIGS.

The country exited its EU bailout program earlier this month, and the economy is growing. But property values remain deflated and debt levels are approaching 125% of the country’s GDP, a level economists say is unsustainable.

Italy and Spain are on the mend, with some upgrades from rating agencies bolstering investor confidence.

Statistics show the strength of recovery in those countries varies widely from one economic sector to another, and growth rates predicted for Y 2014 may fail to keep on track with population growth. Portugal laggs behind, but on a like path.

The Greek government is being kept solvent mostly due to bailout funds from the European Central Bank (ECB). Nevertheless, Greece’s Central Bank is predicting positive economic growth for Y 2014 as a whole. At the least, the Greek economy is shrinking slower than it had been before.

The gradual economic turn around in the USA should help Europe’s export sector, economists said.

But according to Luigi Pugliese, managing director for the Italian offices of consultants Booz & Co., many of the positive signals come from short-term thinking from economic planners.

“There’s too much thinking about the best next step and not enough long-term planning,” he said. “My sense is that there’s no good long-term plan or design.”

Mr. Puglies pointed to the need for dramatic structural reforms in order to foster long-term growth rates,  something that requires political will and capital countries are unwilling to invest now.

“If you could start from scratch and design an economy, there is no way you would have anything resembling these debt laden peripheral European economies,” Mr. Pugliese said.

Giuseppe de Arcangelis, an international economics expert at Sapienza University in Rome, agreed.

“The European Central Bank can’t do more than it’s done, unless it does something extreme like negative interest rates that could add liquidity to the money supply,” Mr. de Arcangelis said, “Growth needs to come from inside these economies.”

If that does not happen , and Mr. Pugliese said it must happen before Y 2015, when bailout loans start coming due it could set up a long and disastrous period of economic stagnation that could have an impact on these countries for years.

According to a recent study from 2 US economists Europe risks losing a generation of leaders who may end up under-educated, under-trained and accustomed to working in an unstable economic climate.

“There is a larger implication people don’t think about, “There is a huge decline in human capital,” they said.

A good 1st step, the economists said, is reforming each country’s banking sector to increase efficiency and ease access to credit.

Others mentioned increasing incentives for innovation or for companies that take on new workers, especially workers aged under 35 anni, or invest in expanding operations at home.

The economists said overall tax burdens should be lowered as that becomes possible in order to reduce their drag on the economy.

“Countries have papered over a lot of problems with EU bailout money,” Mr. Pugliese said, “But this is clearly not a long-term solution. There must be a return to structural competitiveness.”

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Paul Ebeling

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Paul Ebeling

Pattern Recognition Analyst, equities, commodities, forex
Paul Ebeling is best known for his work as writer and publisher of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly-regarded, weekly financial market letter, where he enjoys an international audience among opinion makers, business leaders, and respected organizations. Something of a pioneer in online stock market and commodities discussion and analysis, Ebeling has been online since 1994. He has studied and worked in the global financial and stock markets since 1984.
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