Eurozone Crisis and Australia
If PIIGS could fly
Although the problem begins with the Eurozone countries – those 17 of the 27 members of the European Union (EU) who proportion the euro and specifically with the ineffective peripheral countries of the Eurozone – Portugal, Ireland and Greece (PIG), it has now threatened bigger economies – Italy and Spain (now the PIIGS). The rescue of these economies represents more of a challenge to EU leaders than they can possibly manage.
Two headed donkey
France and Germany, as the principal Eurozone countries, have been meeting, talking, meeting and talking, and meeting and talking. France believes in funding, freeing up the ECB so it can act like the save Bank of Australia and other central edges as a lender of last resort. France also pushes the concept of Eurobonds – bonds backed by the strong economies of the Eurozone and the ECB, so as to get lower interest rates for loans to the PIIGS. Germany says –nein! and insists on austerity and financial rectitude.
It looks like the Germans have won. The resolution is a treaty in March 2012 obliging member states to keep their budget deficits to 3% (Australia’s is at 3.6%) and reduction of debt to GDP ratio of 60%, in addition as allowing for EU supervision of fiscal policies of members. This is ambitious, given that by 2010 debt to GDP ratios of France and Germany each surpassed 80%, Italy hit 119% and Greece 143% (Australia’s is just under 27%).
Will the patients survive?
In the meantime, governments will have to apply austerity measures, cut costs and edges that lent to Greece are taking 50% haircuts.
This is drastic surgery and the question will be whether the patients will survive the surgery. The PIIGS and other European countries are looking at 6 + years of austerity and minimal (if any), and for some, negative, growth – a hard sell to the people who demonstrate and vote.
Can we contain the problem to Europe?
The largest lenders to Greece were French edges. French edges are exposed to other edges, particularly US and British edges, so that the contagion will be sure to continue. Australian edges borrow their funds from these foreign edges.
Haircuts and close shaves
edges taking haircuts, and others exposed to those edges, have to shore up their capital. The only way to do this is to bring in and keep up more funds and lend less. This, in turn brings about liquidity problems. Businesses, who would ordinarily have no problem in raising funds, now have problems because the usual lenders are not lending. This looks like a repeat of the GFC of 2008 and risks being already worse.
No worries, mate?
The impact on Australia of the Eurozone crisis ranges from immediate to long term.
Firstly, stock markets around the world have taken a hammering by without of confidence. The average Australian’s superannuation, based on shares, has taken a drop.
Secondly, reticence of lenders worldwide will deprive Australian lenders of access to funds, tightening up credit.
Thirdly, loss of markets to China slows down production in China, and reduces need for Australian raw materials.
Finally, many Europeans looking at 6 or more years of hardship and high levels of unemployment may opt to move to Australia. Most young Europeans can acquire 12-24 months working holiday visa online, which can rule them to long-lasting residence.
High level immigration has fuelled the economy and now contributes in excess of 350,000 people every year to the population. This figure is not the misleading figure of immigration targets set by the government, but represents the net gain of people coming into Australia every year to work and live, over those who leave. For these people, no matter how long they stay, infrastructure has to be provided for them and those who will succeed them.
Infrastructure requires investment. Growth requires productivity.