Nobody can remember who first referred to the EU debtor nations as ‘peripheral’, but you sort of have to believe the person was either French or German. It sounds like the sort of Freudian slip Christine Lagarde would make.
To the countries themselves, however, the repercussions of being encouraged by cheap ECB money to borrow big are anything but peripheral. The key problem – debt management costs outstripping economic and taxation revenue – is depressingly similar wherever one looks.
Many credit managers, for example, applaud the success of Athens in cutting Greek public expenditure, but Ben May, an economist at Capital Economics in London, warns “We continue to think that some kind of default is eventually very likely.” This was one of the milder responses last week, and the pessimism is justified: tax collections grew only 3.4% over that period as the economy contracted – far below the goal of a 13.7% increase, and another sign that traditional Greek tax evasion is expanding its share of the country’s commerce.
In Spain, as the Madrid Government raids pension and health budgets to stay on target for debt reduction, there is a very specific growing problem at local levels. According to the central bank, the country’s 8,000 municipal governments owe companies some €13 billion, representing more than one-third of their €36 billion total debt.
This is already suppressing Spain’s economy and employment levels, and fears are mounting that the government may have to mount some sort of local bailout. Such a move would cause another bond market yield wobble, but the situation has to be addressed: unless they receive payments, the creditor companies say, they can’t continue to finance operations that employ more than 100,000 people collecting garbage, cleaning streets and maintaining parks. “We’ve been using our own capital to finance the cities,” says Aselip spokesman Francisco Jardon. “But our own sources of finance have dried up.”
Staggeringly, some 125,000 companies—or around 10% of Spain’s total—have gone out of business since the economic downturn began in 2008 – and the second-leading cause of failure among Spain’s small companies is late payments by public administrations. This is where the giant public sector ends up – as even the Americans are discovering.
Portugal, meanwhile, continues to tread water. The Government has announced 5% cuts in public sector salaries alongside a 2% VAT increase after Oberstrurmbannfuhrer Rehn urged the government to speed up the consolidation of its public finances. Les Echos reports that Portugal will also try to raise between €7 billion and €9 billion through new government bonds auctions by the end of the year. They may have to pay a very heavy yield price to get that away….which of course can only make the losing debt-management battle Portugal faces even more of a lost cause.
“Portugal will be using EFSF funds by next Spring at the latest” a top Spain-based currency dealer told The Slog last night, “and Ireland too. It’s inevitable.”
If the broader ramifications of EU indebtedness haven’t yet occurred to people, they should do on hearing that China is back in Greece playing Lady Bountiful: Wen Jaibao said his country would “keep buying Greek bonds in order to prop up eurozone recovery”. I hope he’s done the due diligence on this one, as it could get very expensive indeed. Still, the European People’s Republic has a certain ring to it.
The Slog continues to believe that – short of huge and dangerous Beijing largesse – southern Europe will not recover for a long time. Like Ireland, it is tied to this millstone called The Single Currency which benefits just two member States – Germany directly, and France indirectly. But more German success (and more barmy currency support from the ECB) dooms the Peripherals to expensive exports and no room to devalue.
The logical thing to do would be for either Germany or the debtors to leave the zone, but as I noted yesterday, Trichet and the Franco-German powers that be are having none of that: no leaving, and no EFSF funds until we say so – that’s the deal, take it or leave it. The carrot of further bailout stops the unfortunates from telling Brussels where to stick it.
Meanwhile, outside government and in the workforce, truculent refusal to cooperate with the stitch-up continues. Last Saturday France held another CGT one-day strike, and further actions are planned among the ClubMeds later this month.
The controlling anti-democratic dictation style of the Eurocrats will come home to roost sooner rather than later. Dominic Lawson summed it up well when he wrote at the weekend:
“To an extraordinary extent, the movement towards economic and political union developed without the explicit consent of the peoples within its ambit. This democratic deficit is at least part of the reason there is a serious risk of rioting in the capitals of Europe, as measures to cut national deficits are accompanied by a political shrugging of shoulders and pointing in the direction of Brussels”.
Pontius Trichet may think he can wash his grubby hands of the problem, but he is (like most bankers) wrong. He and the other culprits – Merkel, Sarkozy,Van Rompuy, Barroso, and Rehn – are hammering paper nails into the top of Krakatoa. But it’s not going to stop the eventual eruption: the European peoples will get up off their knees eventually; and when they do, they will extract a terrible revenge.