The EU has a debt problem !
With Brexit looming large, elections in various countries, continuing high unemployment and zero growth the EU has many problems in 2017. Additionally the EU has a debt problem, so what will be the resolution over the coming year, how will it all be solved, and what about investing?
Would you believe that 8 of the biggest 15 debt-to-GDP budget deficits in the world are in the EU? The figures published below are an example of where various EU countries stand as of the middle of 2016 with the first number their ranking in world debt:
(2) Greece – 173.8% – Experts believe the country’s debt-to-GDP ratio could rise to 180% by the end of the decade.
(5) Italy – 132.5% – Experts predict a modest reduction in the ratio during 2017
(6) Portugal – 128.8% – which is ‘challenging’ for the country according to credit rating agency Moody’s
(7) Ireland – 122.8% – The economy has since bounced back and while Ireland’s debt-to-GDP ratio hit 122.8% in 2014/15, it is expected to drop towards 100% by the end of 2016 (Update – Ireland has confounded expectations and reduced its debt-to-GDP ratio below 100%. However many economists are now questioning this as the bounce appears to be linked to accounting and firms moving “brass plaques” to Ireland, whereas reality may be different, and actually the rapid reduction raises more issues. It is just as easy to remove “brass plaques” and so this does not represent sound economics in the opinions of economists – this may be subject to a further blog in 2017)
(8) Cyprus – 112% – experts predict a steady fall in the ratio as the Cypriot economy continues to recover
(12) Belgium – 99.8% – Belgium has borrowed extensively since the global financial crisis of 2008, and public debt in relation to GDP had soared to 99.8% by 2014/15. The country is still paying the price for a series of mega-expensive bailouts, including the nationalization of their main bank.
(14) France – 93.9% – A lacklustre economy and stifled growth have contributed to a bulging French debt-to-GDP figure. Experts have suggested the French economy’s increasing lack of competitiveness and high unemployment could be behind the expanding ratio – government spending has risen in real terms and public debt as a percentage of GDP has steadily increased.
(15) Spain – 93.8% – In 2007, Spain’s debt-to-GDP ratio was a robust 36% – fast-forward to 2014/15 and that figure had swelled to 93.8%.
Should we be surprised this list has so many EU countries. Where is the UK or USA? The UK projected a fall in UK debt-to-GDP in real terms over the next five years prior to Brexit. In post-Brexit world it has stood at around 90.1% in the last few months whilst the Chancellors budget in December 2016 extending borrowing to 2021-22 with subsequent higher UK debt-to-GDP predictions. However, after writing this, all the initial worse case scenarios for GDP borrowing and general economic turmoil have failed to materialise as of January 2017 with the UK again being the highest growth economy in the G7 nations in 2016, for the second time in 4 years. Uncertainty is a killer when it comes to confidence, but it appears that initial predictions over-reacted and the IMF (who are good at predicting the past, but not particularly good at the future) have in January 2017 updated all their forecasts for the UK.
One country of note in the top 15 is the USA:
(10) USA – 104.5% – A combination of pricey bank bailouts, an overstretched welfare system, tax cuts introduced during the George W Bush administrations and expensive foreign wars have taken their toll on the US national debt, which is mainly owed to foreign creditors. Though manageable, the debt-to-GDP ratio had risen to a worrying 104.5% by 2014/15, and now the new President Trump may choose to cause a little more damage with his policies.
First of all, I voted remain in the UK referendum and so, what I am about to write, the EU has a debt problem and the consequences, should be taken in that context of someone who wanted to remain wedded to the EU.
The EU has a debt problem and a lot more besides!
So, of this there is no doubt, the EU has a debt problem but what does this really mean? Well it means for the Chief EU negotiator Michel Barnier, if he bases his negotiating on hard financial facts, the EU27 in reality have reduced negotiating power with the UK as it leaves the internal market. Commentators focus on Britain, preferring to see that the size of the EU means that this is logically a big versus small debate; I would argue this is more a David versus Goliath. Whilst some say that Goliath cannot lose, people forget that Goliath is actually 27 trapeze artists balancing on top of each other, wobbling, wearing one coat that is not particularly waterproof, whilst it is starting to rain and, if their business’ want to borrow money or do an investment trade, for a better coat then they have to go to the bank which David runs.
Some argue that politics will trump (pardon the pun) this with some leaders determined to make an example of the UK. This is to ignore debt is only one of the big problems in the EU; the EU has a debt problem but there are many more! However, of course, emotions can run high at time of negotiation, and whilst the EU27 can say they speak with one voice, whilst actually saying nothing until the negotiation begins, this is highly unlikely to be the case once real discussions begin. (Update 18 Jan 17 – as a result of T May speech yesterday which this article was written before, the first signs of dis-unity and concern appear in the EU. Some have chosen to rubbish the British Prime Minister’s wish list, whilst others speak of a crisis within Europe. Guy Verhofstadt talks of an existential challenge and the EU needs “rescuing now” whilst others talk of a crisis and “a fair deal” must be achieved. Some are determined that whatever the deal is, it must “necessarily need to be inferior to membership”.)
So why do I believe that the EU27 will fail to speak with one voice once the hard discussions start? Some assume I mean self-interest of individual countries will take over. However, I think the set-up of the EU itself and the debt crisis will cause the lack of ability to speak with one voice combined with a serious lack of democracy, perceived or otherwise. The problem is that for many years the bureaucrats have been able to ignore the little people, and by that we should also say the little countries. If you examine the list above, you have several countries that not only have a debt problem but an austerity crisis, high unemployment and a currency that is wholly backed on the basis of one country (Germany) that says it is prepared to do what it takes to keep the EU together. The day that it does not say this, the EURO fails. However, Germany often fails to follow through on those words, preferring to effectively dictate to the smaller outlying countries their economic programs, and through Eurozone rules to compel countries to cease or not provide state aid (Italy and France). Did I mention that when I say that the EU has a debt problem I actually mean everyone except a few select Germanic based countries, and try as we may, this may lead to resentment. As an outsider on this, looking in, Germany will have to do a lot more than it is to keep the EU speaking as one voice, and that may mean buying other countries debt, or further underwriting it, writing it off or actually paying some if it down. All this will happen whilst the negotiation on Brexit will continue.
Germany needs the UK in so many ways, just as the UK needs Germany. If these two great countries fail to recognise that the inevitable fall out will be as Theresa May quite rightly pointed out but in a slightly different way, “catastrophic” for the EU.
Maybe without the debt the EU would be able to be a force, but in reality, throughout 2017 the strings are about to be pulled by the little people. Combining Brexit, President Trump’s attitude, 4 elections in Euroland, zero growth, security issues, ongoing unemployment, austerity and debt I cannot guess what will happen in the next 12 months. Indeed, I feel that something will happen in the next 12 months that no-one will predict, but historians will view as the point at which the EU irrevocably changed or indeed the point at which the project failed.
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EU has a debt problem End
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article.
This article was published on 17 January 2017
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