Reminder: Eurozone Has Its Own Fiscal Cliff
Thursday, November 8th, 2012
By George Leong, B.Comm. for Profit Confidential
Newly re-elected President Obama must deal with the country’s pending fiscal cliff, but America shouldn’t feel alone; the eurozone and Europe also have a massive debt burden that needs to be rectified. The European debt crisis took Greece down with two separate bailouts. Greece actually needed the second bailout to make the payments on its first emergency loan to avoid defaulting. This is a debt that’s spiraling out of control and needs to be corralled, or it will simply destroy the country’s ability to run effectively. This could even happen to the United States. (Read “We Can’t Ignore It: America’s Going Broke.”)
The reality is that the eurozone financial crisis is still around. The market just pushed it aside for the election, but now there will be a shift in focus overseas, to the troubled eurozone.
The problem is that the eurozone financial crisis does not only consist of the massive debt loans that have impacted Greece, Spain, Ireland, Portugal, and Italy; it’s also the threat of another recession in 2013. Already, six, or one-third, of the 17 eurozone countries are in a recession. We are seeing a move toward tough austerity measures, but it has been slow and cumbersome.
Greece is still trying to pass its own austerity plan in order to receive another 31.5 billion euros in emergency funds or risk the real possibility of default. Deep budget cuts are the problem as they are occurring at a time of fiscal confusion, massive unemployment, and a dead economy. The deep cuts will hurt the country more in the short term, but they are needed to help Greece become a contributing member of the eurozone. It could take decades.
A big problem across the eurozone is the high unemployment rate that stood at a record 11.6% in September. About a quarter of Spain’s people are out of work. Greece’s unemployment stands at 23.1%, while Portugal stands at 15.7%, Ireland at 14.9%, and Italy at 10.7%, according to Thomson Reuters. And you think we have it bad here.
The European Commission is predicting a gloomy outlook, with the eurozone contracting 0.4% this year and growing a muted 0.1% in 2013. Add in the massive debt loans and pressure to cut spending and you’ll realize why I’m deeply concerned.
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Spain could see its economy contract by a worse-than-expected 1.5% in 2013, according to the country’s central bank. Recently, Spain presented an aggressive austerity plan, focusing on budget cuts in lieu of tax increases; the country is trying to avoid asking for a bailout and having to meet all of the stricter budgetary requirements that are associated with a financial crisis.
The mess is also impacting France and Germany, the only two pillars in the eurozone. France is finding things are getting more difficult as the eurozone tries to dig itself out of its financial mess. There is also the fear that Germany’s economy could stall, as the country’s industrial output contracted by 1.8% in October. If Germany falls, the eurozone will fall. Macroeconomic research company Capital Economics suggested France and Germany will face another recession in 2013.
The bond buying by both the Federal Reserve and the European Central Bank (ECB) will fail. It will take years to fix the eurozone, and if the economies of China and Japan worsen, the situation could get even worse.
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