UK: Deloitte Monday Briefing: Change In The Euro Area

Last Updated: 14 May 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017

The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues.

  • In response to its existential crisis, the euro area has opted for the path of austerity and economic reform. The aim is to restore the public finances and rebuild competitiveness in the peripheral nations of Europe.
  • Austerity and reform have contributed to deep and continuing recessions in several euro area countries. But, three years in, is the policy working?
  • To answer this question we looked at what has happened to competitiveness, exports and budget deficits across the euro area's so-called peripheral nations of Italy, Spain, Portugal, Greece and Ireland.
  • The big story is that labour costs are heading down, fiscal deficits are shrinking and exports are on the rise.
  • All of the peripheral countries have substantially narrowed their trade and budget deficits since 2009. This year the International Monetary Fund (IMF) estimates that all but Greece will post a surplus on the current account of the balance of payments.
  • Real progress is being made in restoring the health of the euro area's troubled nations. But the nature of the adjustment and the pace of change vary across countries.
  • On many indicators, Ireland seems to be ahead of the rest. It has driven down labour costs, turning a sizeable trade deficit into a surplus and is now growing. The cost of borrowing for the Irish government is well below that of other peripheral euro area countries.
  • Greece has made huge progress in reducing its enormous budget deficit, cutting it from almost 16.0% of GDP in 2009 to a forecast 4.6% this year, less than the UK or the US.
  • More impressive still, is the scale of the underlying improvement in Greece's deficit. Adjusting for the effects of the economic cycle, the IMF estimates that Greece will have a small structural budget surplus this year. On this, admittedly narrow, underlying measure of the deficit Greece will be in better shape than any advanced economy. (Any euphoria at the shrinking of Greece deficit is tempered by the fact that the country has, after Japan, the world's highest stock of debt).
  • Greece has made slow progress in improving competitiveness and this has contributed to a disappointing export performance. This year, for the fourth consecutive year, Greece is likely to be Europe's weakest economy, with economists on average forecasting a contraction in GDP of 4.6%.
  • Indeed, progress in reducing budget and trade deficits not yet brought back growth other than in Ireland. Elsewhere in the euro area periphery unemployment is continuing to rise and economies are continuing to shrink.
  • The process of economic adjustment is slow and painful. Much more needs to be done. But the euro area is making progress. Most forecasters believe that the worst of the crisis is past. Indeed, the IMF forecasts that all of the crisis-hit countries of the euro area periphery will return to growth next year.


UK's FTSE 100 ended the week up 2.5% helped by stronger-than-expected UK and German economic data.

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


  • Stock markets in the US and Germany hit all-time highs while the Japanese Nikkei and the FTSE 100 reached five-year highs
  • Sales of new cars in the UK rose by their fastest monthly rate since before the financial crisis
  • UK industrial output was stronger than expected in March, partly reflecting a surge in energy demand in response to the coldest March since 1962
  • German industrial production recorded a surprise 1.2% rise in March
  • The average yield on US CCC-rated corporate "junk" debt – bonds that ratings agency S&P believe to have a 50% or higher chance of defaulting – fell to a record low of 6.8%
  • Developing countries borrowing costs fell to record lows according to latest data from JPMorgan's EM Global Index, with investors seeking higher yields on offer compared to dollar-denominated debt
  • Portugal successfully sold €3bn of 10-year bonds at a yield of 5.67% in a heavily oversubscribed bond sale, it's first since receiving a bail-out in 2011
  • Germany's Federal Statistics Office said nearly 1.1 million immigrants arrived in Germany in 2012, up 13% from 2011, with the number of immigrants from Spain, Greece, Portugal and Italy having risen by 40% annually
  • The Australian central bank cut interest rates to 50 year lows of 2.75% amid growing concerns about a slowdown in mining and the impact of the strong Australian dollar
  • The US government demanded that designs for a 3D-printed gun be taken offline, having been downloaded more than 100,000 times, citing fears over arms-control laws
  • Dock workers in Hong Kong ended a 40-day strike, having accepted a 9.8% pay rise, with a backlog of thousands of containers having built up at one of the world's busiest ports
  • British scientists at the National Institute of Agricultural Botany say they have produced a new strain of wheat which could increase productivity by 30%, although it will take at least 5 years of tests and regulatory approval before it can be harvested by farmers
  • Estonia became the world's 41st nation in space, with its ESTCube satellite monitoring solar winds
  • Data from consultancy WealthInsight shows Tokyo is the city with the world's most US dollar millionaires, with London having the highest number of multi-millionaires and New York the most billionaires
  • Stornoway black pudding has been granted protected status by the European Commission – putting it alongside the likes of Champagne – meaning that it can only be described as Stornoway black pudding if it is produced in the town or parish of Stornoway on Lewis – prized pudding

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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