Yes, Europe is in trouble

As financial beauty pageants go, they don’t come any glitzier than Euromoney magazine’s annual finance minister of the year award. The magazine’s editors scour the world in search of the perkiest budget bottom line, biggest assets and best-rehearsed answer to the problem of world economic peace.
Our very own Treasurer, Wayne Swan, took home the crown this week thanks to the government’s stewardship of the economy during the financial crisis. But how much glory is there in winning such a pageant when the rest of the contestants have been beaten by a rather large, ugly stick?
A quick survey of some of the other candidates for the gong is instructive. Begin typing the phrase “Greek minister of finance” into Google and the search engine helpfully offers options including “Greek ministry of finance is burning”, giving links to articles from June when protesters set fire to the Finance Ministry building in Athens in protest at budget cuts.
The Greek Finance Minister, Evangelos Venizelos, has been in the job only three months after the former minister, Giorgos Papakonstantinou, was removed after a poll showing four in five Greeks had no faith in his ability to handle the economic crisis.
Across the Mediterranean, Italy’s on-again-off-again Minister of Economy and Finance, Giulio Tremonti, is also under mounting pressure, forcing through unpopular spending cuts and fighting off allegations of abuse of power.
In a delightfully candid admission, Tremonti warned fellow MPs this year the euro debt crisis was “just as on the Titanic – not even first-class passengers can save themselves”. And, of course, he has presided this week over a humiliating downgrade of Italy’s credit rating.
Further west, Ireland’s Finance Minister, Michael Noonan, has also been on the job only since March. Noonan spends most of his time negotiating the terms of compliance on Ireland’s €85 billion ($115 billion) bailout with the International Monetary Fund and the European Union.
Spain’s Finance Minister, Elena Salgado, has the honour of presiding over Europe’s highest unemployment rate at 20.9 per cent, while waiting for a decision by Moody’s Investor Service on a possible downgrade of her country’s credit rating next month.
And that is to say nothing of Timothy Geithner of the US, who presided over the distribution of $US170 billion of federal aid to the insurer AIG, which used some of the funds to pay senior executives.
Is it any wonder, then, that Euromoney’s editors were won over by Australia’s reassuringly bland Treasurer? Swan must have presented in their eyes as a true diamond in the rough.
Basking in the glory, Swan is in Washington today, meeting other G20 finance ministers before this weekend’s annual meeting of the International Monetary Fund and the World Bank.
There is little room for complacency. As the IMF made abundantly clear this week as it revised down its forecasts of global growth, the outlook for global economic recovery is increasingly dim.
In a separate report released on Wednesday night titled Grappling with Crisis Legacies, the fund warned the international financial crisis, now in its fifth year, “has moved into a new, more political phase”.
What began half a decade ago as a private debt crisis, originating from subprime loans by US banks, spread from the US to Europe and the rest of the world, morphing into a systemic banking crisis. Last year it re-emerged as a sovereign debt crisis, as the unsustainable budget positions of several peripheral European nations were exposed. Now it has become a political crisis as countries struggle to get their fiscal houses in order while finding the funds to rescue struggling neighbours.
Of the €6.5 trillion in outstanding euro zone government debt, the IMF estimates almost half is showing signs of heightened credit risk.
It has called on European nations to force their banks to build bigger capital buffers, lest they respond to any new wave of credit instability by raising interest rates or restricting credit, which would stall economic growth.
But the IMF is no financial messiah here. It failed to see the financial crisis coming, as did many others, and the solution it now offers – budget cuts at any cost to rein in government debt – is questionable.
European finance ministers, whose job it is to administer such tough medicine, are being egged on by international bodies to inflict ever sharper budget cuts, and bearing the brunt of the public backlash.
Unemployment rates across Europe are in double-digit territory and the pain of austerity measures, such as tax rises, public sector job cuts, family allowance cuts and increased user charges for medical services, are real.
The danger in the austerity strategy is that it undermines the very economic growth needed to restore revenue growth and help bring budgets into balance in the longer term. It also diminishes the chances that natural inflation will erode the future value of debts.
The euro crisis deepens by the day because world leaders, and the global clubs to which they belong, are unwilling to recognise the truth accepted by most economists: that Greece is insolvent and must have some of its debts forgiven.
This would trigger painful banking sector losses across Europe and the world. But the Band-Aid of bailouts needs to come off at some stage if the debt wound is to truly heal.
Otherwise, it festers into an ever deepening sore that will periodically send pain through the world financial system for years, if not decades, to come.

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One Response to Yes, Europe is in trouble

  1. Magpie says:

    I don’t know, Econogirl,

    Say, let’s talk about Greece. They can’t pay their debt; they not only aren’t growing, they’re shrinking!

    They can’t even pay their public servants, for Christ’s sake!

    Ah! But there’s good news: it appears they still have plenty credit:

    The U.S. approved to grant 400 M1A1 Abrams to Greece

    Watch this space: something smells real bad. Call me paranoid, but I find this ominous.

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