Euro on a Roller Coaster Ride | Trade Samaritan

Euro on a Roller Coaster Ride

The ongoing euro crisis is a combination of two major factors – high debt and slow growth (GDP). These two factors are interconnected as well as heavily interdependent and the adverse effects on the economy are compounded. In spite of bold and tireless efforts on part of the European union and International Monetary Fund, Ireland, Italy and Spain have reported a negative GDP growth in quarter II 2013.

Europe is a continent comprising of 52 countries and Euro-zone was created in late 1999 wherein 17 countries adopted the euro (€) as their common currency and sole legal tender. The Euro-zone crisis hit Europe in 2009 when certain European countries were unable to service and re-finance its sovereign debt. This was largely caused by Portugal, Italy, Greece and Spain – PIGS with an addition of Ireland – PIIGS and Great Britain was on and off thereby making it PIIGGS. The ongoing euro crisis is a combination of two major factors – high debt and slow growth (GDP). These two factors are interconnected as well as heavily interdependent and the adverse effects on the economy are compounded. In spite of bold and tireless efforts on the part of the European Union and the International Monetary Fund (IMF), Ireland, Italy and Spain have reported a negative GDP growth in quarter II 2013.

Now let’s see how the crisis started. As a matter of fact the early signs are seen way back in 2000 when participation in Euro-zone led to a formation of a bubble in the real estate sector in most of the participating countries. It is evident from the below graph that the real trouble for Spain started in 2009 when the slow paced GDP growth stopped and started to fall. 3.8% negative growth in 2009.

Spain GDP – Annual (12 years trend)

Spain Annual GDP (12 years)

And here is the gross sovereign debt of Spain for last 6 years. There is a constant spike in the public borrowing.

Spain Sovereign Debt – Annual (6 years trend)

spain-sovereign-debt-6-years

A downward facing GDP trend and an upward facing public debt trend is a lethal combination as the Debt to GDP ratio worsens with time.

Spain was experiencing a housing price bubble since the time it joined the Eurozone, law of gravity works on the housing market as whatever goes up un-naturally has to eventually come down to its natural position, with the bubble burst came a plethora of borrowers default causing all the major banks to collapse as these banks has borrowed from international markets for onward lending. Market always has a tendency to correct itself; many countries experienced an un-natural rise in real estate prices since they became a part of the Eurozone.

Banks incurred heavy losses and IMF came to the rescue of both the government and the banks. Recession and a negative growth led to unemployment. Spain stands with an employment rate of whopping 27% at the mercy of IMF bailing it out.

Portugal, Greece, Ireland and Italy do not have a different story to tell.

Portugal GDP – Annual (12 years trend)

portugal-gdp-12-years

 

Greece GDP – Annual (12 years trend)

Greece Annual GDP (12 years)

 

Italy GDP – Annual (12 years trend)

Italy Annual GDP (12 years)

 

Ireland GDP – Annual (12 years trend)

Ireland Annual GDP (12 years)

And now let us take us look at the GDP trend reported in Quarter II 2013 for these countries. The trend still does not look very optimistic and the recovery is taking rather long.

Country Annual Change Quarterly Change
Spain -1.6% -0.1%
Italy -2.2% -0.3%
Portugal -2.1% 1.1%
Ireland -1.1% -1.1%

It is a long and a vicious circle of slow growth (GDP), rising public debt, bubble burst and defaults, bank losses, foreign direct investment withdrawal symptoms, finally leading to economic recession and employment.

While there is news and data of modest progress taking place in these crisis struck countries, there is a need to boost production related activity which will in turn boost employment and generate money circulation (demand) in the economy. The rest of the world is waiting to watch yet another wave of renewed industrial revolution taking place in Europe which happens to be the originator of capitalism.

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