Eurozone Finance

[Zinger]

a. National debt isn't necessarily a sign of economic weakness, but rather the proprotion of debt to income and the ability to return debt. Completely common for raising large investment in machines, technology and infrastructure, and returned over time. Some stable state budgets includes up to one third for debt return.
b. The Greek situation is extraordinary of all Eurozone states. Greece has been lying all along about its financial situation, when it applied to join the Eurozone, even when its PM came to US a month ago for financial backing. Only around a week ago they asked for direct financial assistance, and now 160 billion Euros won't completely cover it, population 10.7 million.
A few renown economists think the Eurozone should not assist Greece out of this crisis, citing negative impact on Europe due to inability to return the borrowed funds. The Greek public sector receives 14 salaries annually, state pensions are inflated, only a small proprtion of tax is collected. The fierce demonstrations indicate the inability of their public to realize where they stand financially. The Eurozone could gracefully ask Greece to return to the Drachma until this situation is corrected, currently very far from it. German citizens do not want to see their saving go down the drain, and a week before elections their opinion counts more.

It is tiresome that so many major issues these days do not have good solutions!  For example, the debt of Greece (and Portugal, Ireland, Italy, Spain ...  UK, Japan, US, and EVERYONE except China and Germany!).  

The US news media seem to be accepting that the Euro will collapse, something I would not have thought possible until the financial crisis destabilized so many aspects of the world economy.  One has images of falling dominoes, houses of cards, etc.

[Jeroen Hoppenbrouwers]

At the opposite end of the Eurozone debate, we have now rather nationalist groups in less weak countries that insist these countries should step out of the Euro and return to their former currency before it is too late and they are being dragged into the swamp by sinking Southern-European countries.

I've always been surprised by the ease with which people suddenly want to leave a larger economic group when trouble appears at the far end. I'm not an economist, but isn't a part of the success of the USA, and now other countries such as India and China, that they can benefit from a much larger internal market (i.e. within tax borders, same language, same laws to a certain extent, same culture, ...) than the hopelessly divided European countries that indeed have populations around 10 million for the less populated ones?

Related article about European "think local, act local" mentality:
http://www.roger-wilco.net/eurocontrol-reorganizing-%E2%80%93-is-this-good-for-you


Jeroen
who knows there will never ever be something like the United States of Europe, yet it could be the only way to prevent the old continent, strong in a time where transport and communication were less developed, to shrink to a role of insignificance.

[Zinger]

Jeroen, I agree.
An article translated by Google (needs some corrections), the highlight of which I think is the fear of strong economies leaving the Eurozone:
"The sick man of Europe on the operating table: The crisis endangers the integrity of Spain euro block   
With highest unemployment in Europe, the continent's third biggest deficit private duties much higher than those of Greece, the Spanish economy might not reach a state of insolvency, but the situation is a significant danger to the continued existence of the euro.
Madrid
4.6 million Spaniards - a number exceeding the whole of Ireland's population - are unemployed involuntarily. With unemployment rate of 20.1% Spain becomes a ticking time bomb - economic, social and political - could give Europe, still shocked Greece's debt crisis, a mortal blow. Spain has not lost in huge debt like Greece, but the economic crisis that befell it created a huge government deficit of 11.4%, among the highest in developed countries. These hard economic data and lowering the credit rating suffered by Spain last week severely join pictures in many places considerable lively Latin country. 's hard to ignore the signs of economic crisis. Valencia West, throughout the Mediterranean, Madrid gay considerable towns and villages abandoned school thousands of construction sites, are abandoned. Cranes are off idle pierced the skyline everywhere are signs "For Rent" and "for sale". Government, and economists believe that people in the street, wretched, its inaction march the country to disaster. But the disaster of Spain will not stop its borders, he will affect Europe and with it the whole world.

In some cities, such as coastal town of Denmark, which drew during flowering of the real estate bubble in Spain and many Europeans who wanted to buy a kit and made the coastal area of Mediterranean Spain to Florida, whole streets are for sale. In the city squares spend the day meeting dozens of unemployed lazy after despair of work seekers.

Over the weekend, several days after the rating agency S & P lowered the credit rating of the state budget due Gyaraonutia, the Spanish government reported that the country's unemployment rate rose to the high level of 20% the first time in more than a decade. In the first quarter of 2010 the unemployment rate in Spain rose to a level of 20.1% compared 18.8% in the fourth quarter of 2009. This means that 4.6 million people in Spain, out of a population of 46.7 million work force of about 23 million are unemployed. Unemployment in some areas of the South has been kissing and 30% higher than that. The data, published last week, though published by a government agency accidentally about a week before publication date designated, but after downloading ranking strengthening fears of debt crisis spread in Europe, they still managed to shock investors.

A stock of over 2 million homes

Spain's economy - Europe's fourth-largest economy - is the biggest victims of the global financial crisis, although her condition is not related directly to him.

In the years before the crisis the country's economy grew at a faster rate than most EU members, thanks to a huge real estate bubble had swollen to a 20% of GDP between 1995 and led the 2007 surge of more than 200% in house prices, a large wave of immigration brought with him 5 million immigrants into the country increased its workforce significantly.

But the seeds of the Spanish real estate bubble began to grow even when she agreed to join the euro bloc. Following the passage euro interest rates fell sharply, Spain has become a cheap country foreign investors flowed to the state. In response, the housing market due to flower bubble wave of speculative investments swelled to monstrous proportions, with more than 700 thousand new homes were added to the market every year.

Tremendous pace of construction in Spain, which left a stock of over 2 million homes on the market, the country's economy became one of the largest in Europe. Hundreds of thousands of Europeans rushed to buy a house off the coast of Spain, which had planned to retire. Many Spaniards also rushed to take out loans and buy houses as an investment. Unlike the U.S., where citizens also tend to invest in mutual funds and the stock market, real estate in Spain is considered the safest investment - the most common.

Parallel to the outbreak of the global crisis exploded in Spain's real estate bubble with a crash. The country's construction industry has collapsed and the unemployment rate began to rise at an alarming rate, from 8% in 2007 to more than 20% today. Spain, which had an average budget surplus of 0.7% Between 1999 and 2007, suffered a sudden deficit also rose rapidly, thanks to the growing costs of unemployment compensation and social benefits to the unemployed.

According to government estimates, Spain's deficit now suffers 11.4% of GDP, the third largest in the EU. However, the country's national debt is relatively small, totaling 53% of GDP, compared to 70% in Britain and 115% in Greece. However, Spain's national debt is still twice the debt of Greece, thanks to its size. In addition, the debts of households and the private sector in the country amount to a startling number of 178% of GDP. From this perspective, Spain's situation is worse than the state of Greece.

Scope of duties of 560 billion euros

Poor condition of Spain not gone unnoticed by many economists, warned that Spain is Greece. Unlike the little Greece, Spain is Europe's fourth-largest economy. Further deterioration in her condition, or an attack of the markets of Spain, as happened to Greece, may have catastrophic consequences, Achsahbultat which is the breakdown of the euro.

"Greece is just the tip of the iceberg," said economist Nouriel Roubini this week at New York University, predicted the financial crisis. Roubini added that Spain's situation worse than Greece in terms of obligations of the private sector and households, noting that "in a few days may not be the euro."

Debt scare in Europe reached its peak last week when she took the day after Greece's credit rating is junk-bond level and lowered the credit rating of Portugal, cut the rating agency S & P credit rating of AA from Spain to AA-plus - still a high level, Only two ranks lower credit rating management, but also states the same rating as Slovenia.

S & P expected the Spanish economy will continue to tread with an average growth of only 0.7%, at least until 2016, and published a negative rating outlook for Spain - a move that means more ranking download anticipation. Markets reacted in panic and dropped the world's stock exchanges across Europe. Economist Kenneth Rogoff of Harvard University, estimated that even a 50% probability that Spain will need to extract the International Monetary Fund (IMF). Spain's debts are estimated at -560 billion euros, so try to be kicked off expensive rescue tangled than in Greece. In fact, many economists believe that a more likely scenario, in case of worsening situation in Spain, is the departure of Germany and France, the euro.

Government of Spain, noting that developed markets panic, rushed to try and calm the investors and to emphasize the differences between it and Greece. "Our bond clean, we do not have to seek assistance," Friday said Spanish Economy Minister Elena Asgu. Prime Minister Jose Luis Rodriguez Asfatro, said this week that despite the severe unemployment figures, Spain's economy shows signs of recovery and is expected to grow in 2011. Another step in calming the situation, the Spanish government promised on Friday a series of further austerity measures to help reduce the deficit to 3% of GDP by 2013, including reducing the number of state-owned companies of 106 to 77.

However, economists unimpressed government marches and hang the main responsibility for crisis on the government and the previous. "Whose fault is the crisis? The government, of course. This is an easy question. Most economists know that a problem in Spain before the crisis. It was clear that we can continue to build and sell a million homes a year - than France, Britain and Germany together," says the economist Fernando Fernandez, a professor in IE Business School in Madrid and former chief economist of Banco Santander a senior economist of the International Monetary Fund. He said that joining the euro bloc in Spain lowered its interest rate from 7% to 2% -3%. As a result, the housing market has become cheaper, cheapest credit blinded the government and investors. "It's the classic scenario occurs after the adoption of a new currency, low interest rates, low inflation, there is a bubble then it crashes," said Fernandez.

Most economists now agree that the government is not doing enough to halt the deterioration of the Spanish market. The most urgent reform, they argue, is extremely rigid labor market of Spain, where employees are advanced age benefits in Europe: high unemployment are awarded for two years; to shed jobs Spanish companies must pay them 45 days salary for every year worked in the company and most of them can not cut wages, even in the event of a recession, since the wage is set centrally by a complex set of agreements by sector. Out of the ten claims in respect of dismissal was not justified, nine stops for the employee.

Due to these legal protections, contact companies to create temporary work contracts, whereby one-third currently employed work force in Spain. This created a rigid labor market and not competitive, that labor costs jumped by 30% since the establishment of the euro, compared to 2% in Germany. However, labor market reforms - especially cuts in benefits to the unemployed constitute a huge burden on the state budget - are considered political suicide.

"The government is playing games with himself and wait for the crisis is over and markets will leave us. Only after the markets will do anything, the government will respond in my opinion. But even then they do the bare minimum," says Fernandez. "Nothing will change until the situation in Spain would be really bad," says Gail Alred, an American professor at IE Business School and former journalist at the Economist, specializing in the Spanish labor market.

Even if you try the Spanish government to take steps to reduce the deficit, it would be difficult to do so, because the state is divided into 17 autonomous with their own budgetary independence. "Managing fiscal policy in this country is particularly complicated. Federal Minister of Finance sits on the committee with 17 finance ministers of the various autonomous, we must convince them to make cutbacks Abhucautihen. If I am the Minister of Finance in Barcelona or Madrid, why listen to what this man tells me if I have my own autonomy And if by law it must pass a certain amount anyway? They have no incentive to cut costs, government has no ability to impose fiscal discipline, "says Fernandez.

Fernandez said, the real source of concern is the Spanish insolvency, but a long period of economic shuffle, like Japan's lost decade."