As the dust settles on the terms set out for Ireland’s bailout agreement, the public continue to balk and gasp at the sheer size and scale of Ireland’s indebtedness. Doubts about its ability to carry burden of it remain high.
Notwithstanding this, out of all the PIIGS nations, Ireland is in a much stronger position to gain the economic strength required to withstand the hardship of re-paying the debt. The jungle where the Celtic Tiger thrived may have been devastated by a forest fire but at least this cat is still alive. Very soon, Ireland will reclaim its status as a net exporter. The jungle will renew itself. Ireland can become a rich country again.
The Irish people, unlikely to expect any respite from the crisis, in the short term, are, understandably, now turning their anger on their Government. Meanwhile, the rest of the World will shift its attention towards the next hot spot for Euro turbulence – Portugal.
Unlike Ireland, Portugal’s problems are not related to a banking crisis based upon a property boom and crash. Portugal’s problems are structural. It is suffering precisely because it is in the Euro zone. In the past decade, Portugal’s economy has undergone very little growth. Its industry has become less efficient and competitive. Unemployment has risen above 10 per cent.
In 2009, Portugal’s budget deficit reached 9.4% of its Gross Domestic Product (6.4% higher than allowed under Euro zone rules). Its National debt is 75% of GDP (15% above the allowed limit). Portugal plans to reduce its budget deficit this year to 7.3 per cent, and to 4.3 percent in 2011. Furthermore, it plans to raise VAT from 21 to 23 percent and increase Corporation tax by 2.5%.
Portugal’s planned capital projects, such as the new airport and the construction of high-speed rail lines have been suspended. State-owned companies, including energy utilities and banks are either to be fully or partly privatized. These measures will bring approximately €6 billion into the Portugal’s coffers. Salaries for its civil service are to be cut by 5 percent.
Despite the austerity, Portugal remains in recession. Growth forecasts for next year are only 0.2%. In order to re-finance its old debts, Portugal needs to raise €15 billion by next spring and a further €40 next year. With the bond markets in turbulence, Portugal is finding it extremely difficult, if not impossible, to obtain inexpensive credit. The markets are extremely unlikely to feel confident about Portugal’s ability to resolve its problems. A bailout for Portugal is all but imminent.
If Portugal was the only other problem country left for Europe, Angel Merkel would now be relegating her worries about the Euro beneath her forthcoming Christmas shopping dilemmas. The current fear now is that once Portugal is bailed out, the contagion will spread to one of the Euro-zone’s larger economies, such as Spain or Italy. Out of those two economies, it is Spain, whose alarm bells are bellowing.
At first sight, Spain does not yet look like a problem Nation. Its National debt is only 53% of GDP – still under the Euro zone’s permitted limit. Like Ireland, Spain is suffering from the after-effects of a burst property price bubble. Hundreds of thousands of Spaniards have lost their homes. Spain’s mortgage lending institutions are now saddled with €180 billion of bad debt. Like Portugal, Spain’s economy has been made weaker as a result of being in the Euro zone. The recession in the construction industry has left 1.2 million without jobs. Unemployment is at 20%. Youth unemployment is at 40%.
Spain’s ruling socialist Government has been tardy at tackling its mounting debt problems. As a result of pressure from the IMF and the EU, it has begun to tackle them since the spring of this year. This Summer VAT rate was increased by 2%. This failed to generate revenue because Spaniards cut back on consumption. This also seems to have delayed the end of the recession.
During the next three years, the Spanish Government hopes to save €50 billion through drastic cuts. A further €15 billion will be slashed from this year’s and next year’s budget. Measures designed to achieve this include cutting civil servants’ salaries and slashing subsidies. The Government target is to reduce its budget deficit from 11.2 percent of GDP to less than 3 percent by 2013.
Next year, Spain must raise €65 billion from Capital markets in order to re-finance its debts. Is it realistic to expect the bond markets to supply that amount of money at manageable levels of interest?
If it is not, then is a bailout of Spain a political likelihood?
The political and financial commitment required by Germany would be enormous. Already, German Banks are owed €134 billion by Spanish Banks and companies. Portugal, Greece and Ireland aggregated together represent 7% of Europe’s economy. Spain is Europe’s fourth largest Euro zone economy. A bailout for Spain could cost up to €700 billion. That would “clean out” what remains of the EU rescue fund. Furthermore, a bailout of Spain does not guarantee that euro turbulence would be brought to an end.
It is hard to see how Spain will not require a bailout. It is also hard to see a bailout for Spain being accepted by the Germans. Can anything else be done to save the Euro?
Timothy Garton Ash, writing in the Guardian last week, argues that it is possible, but only if Germany commits itself to a new political and financial structure in place to deal with Europe’s sovereign debt and economic problems very soon. The next few weeks appear to be crucial. Frau Merkel, if she is getting to grips with this crisis, is unlikely to have Christmas shopping uppermost in her mind.