European Union: Looking Back At 2010 - And Forward To 2011

It's traditional at the turn of the year to look back at the 12 months just gone and do some pondering. Was it a good year? Will the new one be any better? And what about those New Year resolutions – how long will they last this time?

For the last couple of years in the January edition of The Gibraltar Magazine, I have set out some thoughts on the previous year from a financial perspective – and my own view as to prospects for the next. I am a natural optimist (probably an essential requirement as I work in business development) so of course I am always of the view that the coming year just has to be better than the last. But how true is this likely to be for 2011?

Consider this summary: major banks rescued; currencies under pressure; interest rates at rock bottom but bank lending still difficult; and property prices plummeting in certain countries. Sound familiar? I wrote a piece along these lines a year ago when looking back at 2009. Put another way, at first glance not much has changed in the last 12 months. But look a little more closely and in certain countries things are markedly different. Let us examine just a couple of examples close to home in the European Union.

I always find it's best to consider the UK first in any review because, here in Gibraltar, we are affected in so many ways by the state of the British economy. Although the government here manages our financial affairs, questions such as the setting of interest rates and of course the vital matter of the exchange rate – of particular importance here is the pound's value against the euro – are totally beyond our control.

In May 2010, the UK general election resulted in a hung parliament and the UK entered a new era of coalition government. The most pressing issue during the election campaign was the truly dreadful economic situation. Once in power, an emergency budget resulted in higher taxes overall and reduced government spending across the board in an effort to reduce the budget deficit.

Without wanting to stray into UK politics, the harsh medicine seems to be having a positive effect overall. Borrowing is steadying and the markets seem to have calmed down a bit. In September, the International Monetary Fund announced that in their opinion the UK economy was on the mend. We are still however in uncharted waters and any new economic waves could still prove dangerous because stability remains fragile.

High profile international events such as the royal wedding in 2011, the London Olympics and HM The Queen's Diamond Jubilee in 2012 are going to attract vast international coverage. Whilst the events themselves will generate huge revenue in their own right, the authorities will also be keen to showcase Britain as a country that has truly turned the economic corner.

How different the economic outlook appears across the Irish Sea as this New Year begins. Formerly known as the Celtic Tiger with a booming economy and Asian-style rates of growth, the situation in Ireland suddenly lurched from serous to critical. Last year saw a marked deterioration when the full extent of the cost of bailing out the Irish banks became apparent. The result was that the annual budget deficit for the year was estimated to be close to 32% of GDP – ten times the normal permitted maximum level.

Eventually, in November, the EU was forced to "recommend" that Ireland sought external assistance. Not only is this type of scenario bad for the country itself, there is also the very real danger that the contagion may spread further into the eurozone. This is why the EU put pressure on Ireland to seek assistance from the financial bailout mechanism agreed earlier in the year.

In Spain it has been a familiar story with another year of stubbornly high unemployment – officially recorded at around 20%. Anecdotal evidence suggests that in some places the real figure is substantially higher – particularly in the 18 to 24-years–old age bracket. As elsewhere in Europe, VAT was increased in the austerity budget and in May the government had to step in to rescue CajaSur, a savings bank crippled by property loan defaults.

Further afield, Greece was the highest profile casualty of the economic crisis during 2010. In May, she was eventually forced to accept a bailout of €110 billion from the EU and IMF. The road to recovery will be a very long and difficult one for the Greeks.

Looking at the currency markets, the euro appeared to be holding its own during the year. This is mainly due to the relative weakness of other major currencies such as the pound and US dollar. Of course, here in Gibraltar we are chiefly concerned with the pound / euro exchange rate. After rising nicely through the summer we saw a fall-off as autumn approached. There are many factors affecting the currency so it is difficult to predict where the rate goes from here.

Interest rates have remained at historically low levels all year and this seems likely to continue for some time to come. During 2010 there was modest tightening in some countries such as China and Australia – where interest rates were raised. Across Europe including the UK and in the United States, the danger is that raising rates too quickly might stifle the fragile recovery process. This is of course the last thing that any of the economies need.

The other half of this equation is inflation and once again, we continue to live in a period of relatively low inflation overall. However, the steady rise in the price of a barrel of oil has certainly made itself felt as much higher utility prices have been seen across Europe.

So what would I predict for 2011? As always, I must add an important "health warning" here. These are only my personal thoughts and with so many factors at stake, my predictions could prove to be very wide of the mark.

It seems reasonable to assume that in the absence of any major new financial shocks – and at the time of writing the whole euro zone project seems to be under threat – a gradual recovery will continue in many economies across Europe and around the world. There are some countries that will experience a slower recovery or worse – just consider, for instance, how much ground Ireland and Greece will have to make up – and there may be increasing public unrest as austerity measures really begin to bite.

For most of us, I suspect that 2011 will be another year in which we will have to continue to rebuild our fitness after the injuries of the recent past. Depending on your point of view, higher interest rates would be welcomed by savers – but not by mortgage holders. We may see some tightening later in the year but the general consensus appears to be for a continued period of very low rates. As for the exchange rate, most forecasters seem to be looking at fairly flat conditions at least for the first half of 2011. I am not brave enough to commit myself in writing but I will be watching developments across Europe for clues as to how sterling will fare in the next few months.

At this time last year, I wrote that the only thing I could confidently predict was that the warm spring sunshine shouldn't be too far away. Twelve months on, I think this remains the only thing of which I can be relatively certain, such is the fragile nature of the international economic scene. Let's hope that this winter is relatively mild and short-lived.

So there we have it. Yes 2010 was similar to the year before. On balance, neither came anywhere near the horrific experiences in 2008 – but the recovery is still limping rather than charging ahead. Overall I believe that 2011 will prove to be a similar.

It only remains for me to wish all readers and their families a very Happy New Year. Let us hope it is prosperous, peaceful and happy for all of us. If you are making financial resolutions this year, good luck with keeping them going!

Happy New Year.

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