Are European Debt Problems Fixed, or Just Papered Over?

european debt problems not fixedIs Europe's economy really healing, or are the Band-Aids pulling loose? Officially, the Continent's fiscal health is on the mend, but each time someone with political clout declares that the European debt crisis is history, some ugly financial news emerges shortly thereafter to undercut those claims.

For example, no sooner did Spanish Prime Minister José Luis Rodríguez Zapatero claim that the European debt crisis was over than Moody's downgraded Spain's sovereign debt.

Oops.

Like many other eurozone nations, Spain is struggling with the grim aftermath of the collapse of a long housing boom: a deep recession and an unemployment rate around 20%. As its economy stumbled, Spain racked up a total public-sector deficit equal to 11.2% of gross domestic product in 2009, almost four times as much as the European Union's guideline of 3%.

While the government in Madrid plans to slash the country's budget gap to 6% next year by cutting spending at its ministries by 15% to 16%, the Spanish citizenry are voicing their disapproval of the austerity program in angry protests. And public resistance to official plans to drastically trim central government spending isn't limited to Spain: Anti-austerity agitation is widespread throughout Europe.

Fiscal Fixes Lead to Political Crises


Greece continues to be wracked by political strife as organized labor resists the extreme austerity demanded by the lenders who bailed the nation out of its debt crisis. Greece received $140 billion from other eurozone countries and the International Monetary Fund while running a deficit equal to a staggering 13.6% of its GDP. It has a plan for lowering that to 8.9% in 2011, but fierce political resistance is undercutting even that modest goal.

Another nation that saw property values plummet, Ireland, faces a deepening fiscal -- and thus, political -- crisis.

Credit agency Moody's recently cut its ratings on Anglo Irish Bank's debt, a downgrade that sent Irish credit spreads to new highs. As a result, the cost of insuring Irish debt from default hit a new peak.

The Dublin government earmarked 25 billion euros to bail out Anglo Irish, a sum that will push Ireland's 2010 budget deficit to almost 25% of gross domestic product. Like every other eurozone country running potentially ruinous deficits, Ireland plans to pare its spending to comply with the EU limit of 3% by 2014.

France, which weathered the global recession far better than most of its EU brethren, is also facing massive resistance to relatively modest reductions in social spending. Government plans to raise the retirement age from 60 to 62 triggered widespread strikes that disrupted airports, train stations and schools. Even at 62, France's retirement age would still be the lowest among developed economies. Germany is planning to boost its retirement age from 65 to 67, the same target that the U.S. Social Security system established some years ago.

Even without these belt-tightening programs, the fiscal backdrop in Europe is dismal: The eurozone is contracting outside the "core economies" of France and Germany.

Not Even Powerhouse Germany Is Immune

While Germany's unemployment is an enviable 7.6%, roughly the same level as it was during the global meltdown in 2008, and its economy grew a healthy 2.2% in the second quarter, the eurozone powerhouse is not without its own unique problems.

Gemany's 2010 growth was largely dependent on a strong rebound in exports because German consumer spending has long been anemic. The problem with relying on exports, though, is that so many of those products are intended to flow into the markets of Germany's eurozone partners -- the same countries that now face massive austerity cuts to government spending and faltering economies.

Germany also has its own serious debt woes. The Association of German Banks recently reported that its 10 biggest lenders may need to raise about 105 billion euros ($133 billion) in capital because of new banking regulations, and that need for extra cash on hand will limit their ability to make loans. German banks also have huge exposure to the shaky sovereign debt of Greece and other troubled EU nations.

Globally, Banks Face Massive Refinancing

It's not just German banks on the hook for hundreds of billions in new financing and bond issuance. Financial institutions around the world will face a major challenge over the next few years: Trillions of dollars in debt must be "rolled over," or refinanced. Globally, banks owe about $5 trillion to bondholders and other creditors that will come due by 2012, according to the Bank for International Settlements (BIS).

But European lenders own a substantial share of that burden: About half of the liabilities -- some $2.6 trillion -- are in Europe.

The BIS has several fundamental and far-reaching concerns about this significant eurozone debt load. One is that banks desperate for refinancing will be competing with governments, which will also have to roll over gigantic sums in the global bond market. Competition for bondholders' favors will result in higher credit costs for business and consumers, with predictable consequences: reduced economic activity.

The BIS's second great concern is the gargantuan sums that have been promised to citizens in eurozone social welfare programs. As Europe's working-age population shrinks and the number of retirees rises, the ability of governments to pay the benefits and service the huge debts that have been accumulated is in question. These issues are documented in detail in a BIS report issued earlier in 2010: The future of public debt: prospects and implications.

The choices facing governments with rising social welfare and debt costs are bleak: Cut benefits, raise taxes on a dwindling base of workers, or both.

Eurozone leaders are undoubtedly anxious to calm any fears that the region's interlocking banking and sovereign debt crises are still unaddressed. But credit agencies, demographics, public protestors and the bond market are all issuing warnings that official pronouncements and empty plans for future spending cuts are at best Band-Aids being hastily plastered over Europe's longer-term structural problems.

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Norman

EASYSOLUTIONS; THE ROT IS SYSTEMATIC, HOW TRUE! The German economy in 1980 was still subsidized by billions of US $ foreign aid under the Marshall aid plan. The Japanese econonomy in 1982 was still under the US umberella of defence, in return for 7.5% of the Japanese GDP, resulting in Japans governmental income and cash flow rebuilding of the INDUSTRIAL COMPLEX. Japans domestic policy was to rid herself of foreign war military costs and produce manufacturing jobs for its prime natural resource,ie, many disciplined people. As a visitor to many Japanese factories I was proudly told by their top management that Japans disciplined workforce was the backbone of their economy. They admitted that the white man is more creative and inventive, but it takes a strong force of well trained yellow men to build a good strong reliable car as an example, they were proud that a member of a Japanese union also sits on the board of directors in every manufacturing business plant, they were proud to state that they got many good quality control comments from their workers, and they told me that American executives were paid too much, they quoted the CEO of Toyota only got $500,000 versus the millions paid to eneducated US CEO,s the example they gave me was the Tokyo rail road system, at that time the CEO had to work his way up from the lowest ticket collectors job. In one visit to a brand new steel casting foundry, paid for by the government I was given a detailed description of their micromanaged quality control, this was for the product we were importing, but this huge operation also cast car engines, I saw the three major car builders all got their engines from the same source, this was against the anti trust laws for our US car builders yet the imports were commencing to flow in ever increasing numbers into the USA which had deliberately lowered import duties under the guise of exporting Mc Donalds & Coke a Cola to the huge export markets in Asia, and we were buying illegal built cars that easily outperformed our USA vehicles. The car market they focussed on was the female working moms who needed a small low priced long life vehicle with low fuel costs. In 1982 they proudly stated they had 2.5%unemployment. In 1980 many Japanese industrial cities just north of Tokyo had open sewer systems. In 1985 almost all the sewers were closed pipes and Tokyo was in the start of the real estate bubble, I was told that one square yard of land in downtown Tokyo cost over $1 million. The disciplined society was still proud that women could walk the downtown city streets at midnight, but the signs of affluence were showing clearly that this was a wealthy country in the mid 80's. Germany in the mid eighties was also showing strong signs of affluence, and their unions were stronger than ever, along with France and all the tiny countries, SWitzerland etc Europe was looking strong, except for the UK who had struck oil in the north sea and the "Iron Lady" was hell bent to cripple the badly behaved UK unions,she exported most of the UK factories to SE Asia and now the ROlls Royce and the Mini Cooper cars are built in Germany, and the Jaguars are built in the Jewel of her colonies, in India. THE US SOLUTION IS SIMPLE,INCREASE IMPORT DUTIES BACK TO THE OLD TARRIFS IN THE 60'S AND SUPPORT PRESIDENT OBAMA IN HIS LONG RANGE EFFORTS TO BALANCE OUR TRADES WITH THE REST OF THE WORLD, HE STARTED WITH WIND FARMS, SOLAR ENERGY, TO EASE OUR $800b/YR OIL IMPORTS, HE DID SAVE GM, WHICH SAVED A GREAT COMPANY, MANY JOBS ETC. I learned from a number of bloggers on AOL that US based Japanese car builders send all their profits back to Japan, same for German built cars, in which case we should now buy all American based cars which have excelled in recent quality controls, and realize that it will take sensible long range government planning to turn this huge (worlds largest still in my opinion) economy around to a balanced budget, my guess is that since it took us 30 years to dig ourselves into this black hole of debt/trade imbalance it will take us at least 15/20 years since we have now created huge masses of computorized technology/records to assist the US government guide us through the maze of confusions that are amplified with stupid politics that divide us with a two party system when one party seems to think that NO to everything must be the right vote. Its clear from history in the last 30 years Japan & Germany lost the WWII battle but with US foreign aid they have won the economic battle, now we must focus on our own US debt problems and support a good well educated working class.

October 01 2010 at 3:53 PM Report abuse rate up rate down Reply
tivolicafe

In the USA live millions of Italians that are interested to know how situation is there, but you people never report any thing. If anything is said is only something stupid and does not make any sense. We ask: why so much disccimination mostly by the American and english media? Do you like it or not Italy is the 6th large idustrial nation and most the time has a surplus in trade, the Banks there do very well, the unemployment at 8,2 is one of the lowest in Europe. So why so much idifference and hstility? Frank Stancato, 487 Adele Ct, Englewood, NJ

October 01 2010 at 3:34 PM Report abuse +1 rate up rate down Reply
Maryanne

Well if the European debt problems are papered out, then so isn't the USA. I have not believed in quite a while that the Euro debt crises, or the US debt crises has been getting better - its been getting worse. Nor do I believe that our economy is improving - its all doctored up figure work - anything to get us to go out and spend more money. I know too many people over in Europe to believe that the debt crises or economy is improving over there, and ours is no different. I hear the same complaints there as I hear over here. This is all an illusion that has been created for us to feel at ease.

October 01 2010 at 2:57 PM Report abuse rate up rate down Reply
hbuy

The long-expected decline of an unsustainable economic model. http://dailyreckoning.com/day-care-or-default-the-long-expected-decline-of-an-unsustainable-economic-model/

October 01 2010 at 2:33 PM Report abuse rate up rate down Reply
crkbirdie

Were they not just rioting in the streets earlier this week?

October 01 2010 at 2:14 PM Report abuse +1 rate up rate down Reply
easysolution

The problems remain - too much debt and too little growth in the engines that actually produce real wealth. The rot is systemic. The polititians and the central bankers have spread the cancer of deficit spending and the debasement of their currencies in almost all of the developed nations. They have promised benefits that they cannot pay for with a sustainable revenue stream. You cannot spend your way to prosperity. The ultimate outcome to these schemes is always a default, in one form or another. The long term value of every fiat currency is eventually zero. Buy gold; sell the dollar and the euro.

October 01 2010 at 1:03 PM Report abuse +4 rate up rate down Reply
BUFFALO

The european union could be a thing of the past if the countrys that are doing well need to burden the load every time one of the members have economic problems.The other option is the union gets a lot smaller. It was just a bad idea that has proven its self to be a failure and member states are not going to let themselfs be burdened to the point of failure.

October 01 2010 at 9:55 AM Report abuse +5 rate up rate down Reply