Download The eurozone domino effect

The eurozone domino effect
Developments in the eurozone are important to South Africa, because more than a third of our
exports go there. In the past year or so, many countries in the eurozone have been struggling
financially. First Greece went bust. Now Ireland has been bailed out by the European Union
and the International Monetary Fund.
The Irish crisis is far more serious for the euro than
the Greek one. The thing that can rescue Ireland is
commitment from the other eurozone nations to salvage
its economy. Ireland had one of the most successful
economies in the world over the past two decades. Its
government was never extravagant. When the crisis hit,
it didn’t bury its head in the sand, it took every austerity
measure imaginable to fix the problem by itself.
The eurozone is an economic and monetary union
(EMU) of 16 European Union (EU) member states
which have adopted the euro currency as theur
sole legal tender. It currently consists of Austria
So which country will need a bail-out next? Portugal
seems the most likely next victim. It had a deficit of
9.3% of gross domestic product in 2009, the highest
in the eurozone after Ireland, Greece and Spain.
Its government aimed to narrow that down to 7.3%
in 2010. In a recent Bloomberg poll, 38% of global
investors said Portugal was ‘likely’ to default. In Greece
the main problem was fiscal indiscipline, in Spain a
credit-fuelled housing boom-turned-bust, similarly in
Ireland, but coupled there with an outsized banking
sector. Portugal’s challenges are related to the rate of
potential growth and private debt.
And after that? Is Spain safe? It has the second highest
budget deficit in the eurozone and with a stagnant
economy, it’s going to be very hard to make any
significant reduction to that.
Alexander Forbes Financial Planning Consultants (Proprietary) Limited
(Registration Number: 1995/012764/07), FAIS Licence No. 31753.
Alexander Forbes Individual Client Administration (Proprietary)
Limited (Registration Number: 2007/015632/07, FAIS Licence No. 32494.
Italy is in danger too. It has remained under the radar,
mostly because it has avoided running up big budget
deficits. But it has a huge stock of debt, a legacy of past
overspending and its economy has been in terrible
shape since it joined the euro.
And so is France. It has a stronger economy than many
of the peripheral eurozone nations. But as the recent
protests over the very modest pension system reforms
illustrated so vividly, no other European country remains
so tied to an outdated, expensive social system as the
French.
In each country, it will be a different trigger that causes
a collapse in financial confidence. The root cause is the
same though. When the euro was launched, it was a big
bet that sharing a currency would make a group of very
different economies converge, and allow the European
Central Bank to operate a single monetary policy.
It was an interesting theory, but it turned out to be
wrong. The economies are just too different to allow a
single central bank to manage all of them. Interest rates
are always wrong everywhere. How that expresses
itself varies. In Greece, it was a fiscal crisis. In Ireland, a
banking collapse. In Spain, a construction bubble that
burst. In Germany, a massive trade surplus.
[Source: Bloomberg]