As a timely Christmas gift of liquidity, the European Central Bank (ECB) offered €489bn in three-year loans to more than 500 European lenders. Although the ECB’s action was expected to encourage banks to buy the high-yield debt of troubled European countries, banks are also expected to use the funds to bolster their balance sheets in anticipation of the first quarter, when bank and government debt will be due for refinancing.
As we close 2011, amidst a possible recession in the Europe and pervasive talk of European sovereign debt, yields, spreads, and other technical jargon, we should look at the Eurozone economy in more simplistic terms. The “Eurozone” refers to the 17 countries that use the Euro as their currency, including Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands, Portugal, Slovakia, Slovenia, and Spain.
First, according to International Monetary Fund estimates of Gross Domestic Product (GDP), the troubled European peripheral economies represent approximately 35% of the entire Eurozone GDP. The troubled peripheral economies have come to be described by the infamous acronym “PIIGS”; Portugal, Ireland, Italy, Greece, Spain. With over one-third of the economy represented by the PIIGS countries, with higher budget deficits than the overall Eurozone, these countries will continue to cause turmoil in the overall Eurozone through 2012. By comparison, Germany, The Netherlands, and France, comprise 27%, 6% and 21%, respectively of the entire Eurozone GDP. While countries with high fiscal discipline such as Germany and low unemployment such as the Netherlands help keep the Euro in place, the high proportion of troubled economies within the Eurozone have led speculators to forecast the decline of the Euro as a currency. The integrity of France’s economy has come into question with its triple-A credit rating in question as Standard & Poor’s has the country on a negative credit watch. The PIIGS acronym may come to be known as PIFIGS.
Second, the Eurozone is plagued by high unemployment. The average unemployment rate of the 17 Eurozone economies is approximately 9.8%. Unemployment ranges from 4% in Austria and The Netherlands, to 16.5% and 20.7% in Greece and Spain, respectively. Government austerity measures will further impact wages and social benefits, leading to decreased consumer spending and possibly pushing the region into recession.
As we enter 2012, many anticipate recession in Europe and the demise of the Euro as a currency. The ECB may continue to attempt to stimulate the economy thoughout 2012. However, but unless the budget deficits and the unemployment levels of many Eurozone economies are improved, we are likely to see a stagnant economy similar to the U.S., unresponsive to central bank action. Going into 2012, I regard George Washington’s prediction, “Some day, following the example of the United States of America, there will be a United States of Europe” as highly unlikely.
