UK: Deloitte Monday Briefing: Economic Adjustment In Europe

Last Updated: 11 December 2012
Article by Ian Stewart
  • The headline news from the euro area has been downbeat. But amid the gloom there are signs of progress.
  • Last week the 'troika' of the IMF, the EU and the European Central Bank reached a new funding agreement for which will cut Greece's long term debt burden. Meanwhile Portugal passed another hurdle by agreeing an austerity budget for 2013.
  • Confidence about prospects for the euro area has been on the rise since early September when the ECB announced a new, radical programme to buy the government bonds of at-risk countries without limit. Last week's news boosted confidence further, helping take Italy's cost of borrowing to the lowest level in 2 years.
  • Two studies released last week that suggest that the painful process of adjustment in the peripheral euro area economies is starting to deliver results. A joint study conducted by Berenberg Bank and The Lisbon Council finds that "the euro area has advanced significantly further [in 2012] on the rocky road to balanced growth in the future". Another study by insurer Allianz concludes that "behind the less pretty headlines, genuine progress is being made towards restoring the health of the euro area economy."
  • Both reports argue that the peripheral euro area countries have made significant progress in restoring competitiveness. Labour costs are heading down, fiscal deficits have fallen sharply and exports are growing.
  • I met the author of the Berenberg paper, Dr Holger Schmieding, last week. He believes that if Europe sticks to the path of reform it could become one of the fastest growing parts of the industrialised world in a couple of year's time. He also believes there is a tendency to overstate the weakness of the euro area, and points out that the euro area fiscal deficit is smaller than those of the US, Japan and the UK.
  • The hard data do show that change is happening. Greece reduced its fiscal deficit before interest payments by a hefty 13.4% of GDP between 2009 and 2012. Spanish and Portuguese exports have risen by 22% in the last 3 years. Labour costs have been falling in Greece, Portugal, Spain and Ireland (though not Italy). With German and French labour costs on the rise this means that the competitiveness of much of the euro area periphery is starting to improve.
  • Indeed, some are now starting to worry that the real threat to European competitiveness lies, not the periphery, at the core of the currency zone. Last month the Economist declared France to be the "time bomb at the heart of Europe", citing a rising budget deficit, large trade deficit and the fact that its government accounts for a larger share of the economy than in any other euro area country. The recent decision by the car-maker Renault's decision to build two new vehicle platforms in Valladolid, Spain, citing the "competitive performance" of the workforce there, plays to such fears.
  • The debate about competitiveness arouses strong passions. Different economic indicators give different messages and much is subjective. But two things are clear.
  • First, the pace of reform and the time it takes to raise growth rates varies across countries. Ireland seems to be ahead of the rest of the euro area periphery. On average economists see the Irish growing by 1% in 2013 driven by strong exports. By contrast Italy, Spain, Greece and Portugal are all expected to contract further next year, albeit at a slower pace. The IMF does not see Greece returning to growth until 2015 by which time its economy is forecast to be 25% smaller than at the start of the crisis.
  • Second, reforming economies takes time. A recent paper from the Organisation for Economic Co-operation and Development (OECD) found that the full benefits from structural reforms usually take about five years to materialise.
  • The hope among European policymakers is that the euro area will emerge from the current crisis stronger and more competitive. Economies can certainly achieve remarkable change. The real question is whether countries can sustain the political will and public consent needed to make it happen.


UK's FTSE 100 ended the week up 0.8%.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • Canadian central bank chief Mark Carney was announced as the next Bank of England Governor, to start the role in July 2013 – Bank of England
  • Greece's 'troika' of creditors agreed to release a long-delayed €34bn aid payment to Greece and softened the terms of existing Greek debt – euro crisis response
  • Greek Prime Minister Antonis Samaras welcomed the deal, saying "[a] very grey and very dark period for Greece closed definitively" – euro crisis politics
  • The Portuguese government approved its 2013 austerity budget, aimed at reducing the budget deficit to 4.5% of GDP from an anticipated 5% this year – euro crisis response
  • Italy's borrowing costs fell to the lowest in two years, with the Italian government selling €2.98bn of 10-year bonds at a yield of 4.45% - Italy
  • US consumer confidence reached a four and a half year high in November, according to data from the Conference Board – US growth
  • The US economy grew by a revised annual rate of 2.7% in Q3 2012 according to the Commerce Department, up from a previous estimate of 2.0% growth – US growth
  • Spaniards spent €320m on pay-TV services in Q2 2012, an 18% rise on the same period last year, according to data from Spain's National Observatory of Telecommunications and Information Society – recessionary spending
  • The European Commission agreed to release €40bn of loans to four Spanish banks, with the banks having to make significant reductions to their loans and investments in the next 5 years – banking stress
  • Italian bank Monte dei Paschi di Siena, the world's oldest bank, requested an additional €500m from the Italian government due to concerns about the profitability of transactions conducted in previous years – banking stress
  • The OECD downgraded its 2013 growth forecast for its group of 34 member countries to 1.4% from 2.2%, warning that "[t]he risk of a major contraction cannot be ruled out" – slowdown
  • Eurozone unemployment rate reached a new high of 11.7% in October, with French unemployment reaching a 14-year high – unemployment
  • Lloyd's of London, the world's largest insurance market, warned there is a £105bn global insurance deficit that leaves 17 emerging economies exposed to the long-term costs of natural disasters – disaster economics
  • French president Francois Hollande said the government would consider nationalising ArcelorMittal steel plants in France. The Mayor of London responded by welcoming Indian businesses to 'Venez à Londres, mes amis!' [Come to London, my friends!]" – global capital flows
  • Ratings agency Fitch cut its short-term rating for Argentina to "C", one step above default, citing the deepening recession and a "tense and polarized political climate" – Argentina
  • UK schools provider Alpha Plus announced plans to launch a 7 year retail bond, paying 5.75% and secured against Alpha's £131m portfolio of schools – search for returns
  • Peer-to-peer lending at Zopa passed £250m in total loans arranged, with latest lending figures 90% higher than the same period last year – peer-to-peer lending
  • US sales of iPhones overtook those of Android phones during the 12 weeks to 28 October, according to data from researchers Kantar Worldpanel – smartphone revolution
  • The Japanese government announced a new Y880bn ($10.7bn) stimulus package aimed at supporting small businesses, providing employment support and rebuilding areas affected by the March 2011 earthquake – Japan
  • Electronics retailer Dixons Retail announced an £80m pre-tax loss for first half of 2012, partly due to losses at the company's French unit Pixmania – Dixons
  • Disneyland in Tokyo has suspended sales of inflatable Mickey Mouse heads at the theme park due to a global shortage of helium, the lighter-than-air gas – deflation



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