Eurozone Debt Crisis and Future Predictions - Essay Example

Eurozone debt crisis and future predictions Introduction With the coming of the second decade of the 21st century, there were widespread hopes that the economic downturn of the 2007-08 and its effects thereafter, would finally be over and there would be strong economic recovery and subsequent growth. The economic crisis of the 2007-08 fiscal years has almost turned symbolic representing the “the first decade of the 21st century” (Khan, EU debt crisis, 2011). During the 2010 Christmas season, the majors newspapers completely ignored the crash of the Dubai market (considered by many as an economic marvel), and decided to focus only on the leading economic powers of the world that showed economic growth for the first time after the 2008 fiasco, despite the expert views that warned against being too optimistic about the future (ibid; Warner, Warner predictions for 2011: US comeback, eurozone debts a bigger threat, and Vince Cable moves on, 2011). Soon after this optimistic representation of the future global economy, Greece made headlines, where the investors started asking if it would be ever possible for the country to “pay off the £259 billion in government debt it currently owes’ (Khan, ibid). Soon Ireland and Portugal followed suit, while predictions show bad signs for Spain and Italy (Lucas, Find Safe European Stocks out of Unsafe Europe , April 2011). Thus, we find that Euro has taken a deep battering from the start of the new decade, with widespread fears that this economic crises may lead to the break-up of the Eurozone. Discussion In recent news published, we find that it presents gloomy figures, “The Eurozone crisis has gone from bad to worse as debt contagion threatens to engulf Italy. With analysts predicting that Britain could lose as much as £43 billion should the Italian economy fold, Chancellor George Osborne called on his Eurozone colleagues to take "decisive action" before the situation gets any worse. He also warned that Britain was "not immune" from the crisis” (Clarkson, Q&A: How will the latest eurozone crisis affect the UK? 2011). Thus, we find that the economic recovery has again hit a critical roadblock, where the economist Peter Spencer on 18th July 2011 stated, "The risks to the world economy and the Eurozone are plain to see, starting with the Greek default, threatening a domino effect on Portugal and Ireland, followed perhaps by Spain and Italy"(cited in, skynewsHD, July 2011). In review by the Ernst & Young group, we find that the predictions are not very optimistic for the second half of the year. In this report, it is stated that the economic forecasts show every indication of an increasing “EU sovereign debt crisis” (Ernst & Young Eurozone Forecast, 2011, 4). The review also shows that it is almost impossible to avoid the non-payment of the debt incurred by the Greece government. Similarly it would be also impossible to frame an economic restructuring, and in probability the country would require another bailout loan. However the review further adds that “a restructuring nor a bailout are in themselves likely to provide lasting solutions and restructuring would almost certainly carry in its wake the necessity of similar exercises for Ireland and Portugal. An additional uncertainty is whether debt restructuring comes via an orderly or disorderly process. If it is the latter, the risk of contagion to other countries increases and the Eurozone’s reasonably healthy growth prospects for 2011 and 2012 are likely to be extinguished. In fact, the economy would go backward” (ibid). Fig 1: The table below shows GDP growth rates for the European Union and select individual countries. Here we find that the 2011 and 2012 growth predictions vary from 4-5% for countries like Turkey and Poland, and an average of 1-2% for the PIIGS countries at the other end (Source: Lucas, 2011). The graph shows a picture where we find that majority of the countries perform badly (economically) in 2011, with indications of a slightly better show in 2012. Fig 2: In this representation of the Eurozone GDP, we find that the debt crisis is being predicted to worsen in next the 1- 2 years, thus showing the ‘mess’ that the Eurozone financial crisis is in (source: Ernst & Young Eurozone Forecast, Eurozone, June 2011,15). Fig 3: here in this graph we find that the peripheral debt burden is the highest in the Eurozone countries in the governmental and banking sectors showing the grave situation of the Eurozone economy and signalling that debt restructuring and a new loan from the IMF and EU to be absolutely a necessity. As per the data from the Bank of International Settlements (BIS), as of Q4 2010, German and French banks owned US$156 billion (around 2.7% of the two countries’ GDP) of government debt from peripheral countries, of which US$46.1 billion was Greek government debt. The Ernest and Young review also predicts that it was being expected the “Greek government debt to rise to close to 170% of GDP by 2013, with interest payments amounting to more than 20% of government revenues” (Ernst & Young Eurozone Forecast, 2011, 15). Fig 4: the graphs show the countries that are facing the most acute economic crises in the Eurozone. The debt position is extremely grave or Greece, for which the IMF predicts that the country’s gross debt–to–GDP ratio will increase to somewhere around 170% by 2013. Greece is also faces a severe liquidity crisis, and the debt redemptions from 2011–15 will cross €200 billion as predicted, thus showing the nature of the serious trouble faced by Greece economy (Ernst & Young Eurozone Forecast, 2011, 12-13). Almost a year into the sovereign debt crisis, there are however no signs in the abatement of the economic tension, while as we have seen that it is almost certain now that Greece would require kind of debt restructuring, and this crises is slowly spreading into the peripheral countries like Ireland and Portugal, and these countries are facing somewhat similar, though less severe, debt crisis (fig 4). However, here the Ernst Young review opines, “A disorderly restructuring that would involve significant haircuts (probably at least 50%) would have a large negative impact on banks’ balance sheets across the Eurozone. The hit on the banking sector would in turn imply that the Eurozone economy as a whole is affected, via more restricted credit and negative confidence effects on businesses and households”(ibid). Fig 5: Predictions of eurozone economic scenario in the next 2-3 years (Ernst & Young Eurozone Forecast, 2011, 16). From an overall look at the various indicators, the review predicted that the Eurozone GDP would continue to growth at 2% in the remaining half of 2011, 1.6% in 2012, and 2% between 2013–15 (fig 5). It further states that a “stronger-than expected growth in the core Eurozone in Q1 2011, at 0.8% quarter on quarter, has led us to raise our forecast for this year. Nonetheless, the overall shape of the forecast has remained broadly unchanged and we continue to expect a relatively slow recovery. In the seven quarters since the start of the upturn, the Eurozone has recouped around two-thirds of the losses in activity of the 2008–09 downturn. We think that it will take another five or six quarters before it returns to pre-crisis activity levels” (2011, 16). Even for strong economies like Germany that shows growth despite the crash in the surrounding Eurozone countries, the predictions hold that “Germany’s export boom will continue to drive the economy forward strongly in the first half of 2011..[but] a renewed deterioration in the global environment and continued weakness in domestic spending are likely to see growth lose steam in the second half of the year and in 2012” (CNBC, The Eurozone’s Hidden Power House, 2011). Conclusion Thus, it is very clear that the euro is moving on a downward path and is hitting an all-time low as against the dollar. Sovereign debt levels are very high and the debt-GDP ratios are moving much higher than the Eurozone’s projected aim of 3%. However, it is for the best of the entire world that the Eurozone and the euro do not break-up, and the political leaders are well aware of it. As Nikolaus Keis, economist, UniCredit Bank AG, frames it “Policy makers, financial organizations and central banks are working feverishly to prevent the crisis from spilling over to further periphery or even core countries and to establish a long term stability mechanism[...] Investors, however ,remain sceptical”(cited in Lucas, 2011). Works cited Clarkson, D. Q&A: How will the latest eurozone crisis affect the UK? msn money. 13th July 2011. Web. 18th July 2011. http://money.uk.msn.com/news/world-economy/qanda-how-will-the-latest-eurozone-crisis-affect-the-uk CNBC, The Eurozone’s Hidden Power House. January 2011. Web. 18th July 2011. http://www.cnbc.com/id/41130894/The_Euro_Zone_s_Hidden_Powerhouse Ernst & Young Eurozone Forecast. Eurozone. June 2011. Web. 18th July 2011. http://www.ey.com/Publication/vwLUAssets/Eurozone_summer_2011_main_report/$FILE/Eurozone_summer_2011_main_report.pdf Khan, A. EU debt crisis. Khilafah.com. 14th March 2011. Web. 18th July 2011. http://www.khilafah.com/index.php/analysis/europe/8990-eu-debt-crisis-the-latest-chapter-in-the-global-economic-crisis Lucas, K. Find Safe European Stocks out of Unsafe Europe. Taipan publishing group. April 2011. Web. 18th July 2011. http://www.taipanpublishinggroup.com/tpg/investment-market-reports/safe-european-stocks.html skynewsHD. Eurozone Debt Crisis Hits UK Growth Forecast. July 18th 2011.Web. 18th July 2011. http://news.sky.com/skynews/Home/Business/UK-Growth-Slashed-As-Recovery-Hits-Critical-Juncture-Says-Ernst-And-Young-ITEM-Club/Article/201107316032369?lpos=Business_First_Buisness_Article_Teaser_Region_ Warner, J. Warner predictions for 2011: US comeback, eurozone debts a bigger threat and Vince Cable moves on. January 2011. The Telegraph. Web 18th July 2011. http://www.telegraph.co.uk/finance/comment/jeremy-warner/8237302/Jeremy-Warner-predictions-for-2011-US-comeback-eurozone-debts-a-bigger-threat-and-Vince-Cable-moves-on.html Read More