Europe has come a very long way from its early days where geopolitics and security concerns trumped pure commonsense economics (great oxymoron there!). PIIGSty is going to go out on a limb here and suggest that, if you strip away the hysteria and overreaction, Europe is more secure than it first appears. The problem in Europe isn’t necessarily the economics. Using the logic from a number of commentators, we have compared a number of European countries most featured in recent debate. The categories are:
- High Risk: PIIGS – Portugal, Italy, Ireland, Greece and Spain
- Moderate/Mid Risk: France and Belgium
- Low Risk: Germany, Netherlands and the UK
The correlation between the actual figures and the perceived ‘risk’ according to most commentators is puzzling at first glance. The following table outlines the change since the formation of the euro in 1999 (Greece having joined in 2002 and the UK a non-member for comparative sake). The slide in budget balances give is uniform across the board. The PIIGS look like the worst offenders…but Italy (@ 2.9% change) looks quite stable. The erosion in the public finances in 2010 gives an insight into why Ireland, Greece and Portugal requested an EU-IMF bailout deal. Spain however, with a worse situation than all three, did not. Italy witnessed a moderate change from 1999 levels of less than 3%, similar to ‘moderate risk’ nations of France and Belgium. The Italian problem must lie elsewhere.
*The Irish figure amounted to a deficit of €50.3bn including an exceptional refinancing cost to prop up Anglo Irish Bank of around €32bn-€34bn . Without this, the level would be about 12%
So, clearly the level of sovereign debt in the PIIGS is quite substantial. Ireland, Portugal and Greece (all EU-IMF bailout recipients) have increased their sovereign debt levels by almost identical levels since the formal creation of the euro in 1999. Italy and Spain have very different (and more modest) results.
Putting all this together pictorially, we get…
The picture isn’t as straight forward as some commentators suggest. If its all about sovereign debt, then why is Italy suddenly a ‘panic’ problem when the level of debt has changed very little since 1999. Spain has even witnessed an improvement in its position since its entry into the euro. Looking at budget deficits, its clear that some countries (UK, France, Belgium and the Netherlands) are arguably not in a comparatively better positions than Italy. The ‘High Risk’ category is sufficiently large and feasibly encompasses a wider selection of European countries than is clear at first glance. Truly, the problem of debt and budget deficits is more of a European problem than some countries are willing to admit.
You never know. Is it possible some countries are more willing to pass the burden onto the PIIGS to avoid scrutiny and their own economies by investors? Is this all about governance? Are countries with more stable governments (such as in the UK) more likely to weather the storm and thus their technically ‘High Risk’ position isn’t viewed as serious by the markets?
Food for thought at least…