Blog

The world financial crisis goes into extra innings

0 925 Market Intelligence

Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

Economic statistics, tables and graphs aren’t just abstract concepts. Sometimes what they reveal results in policies that spill over into the streets. Such is the case in some countries in Europe.

Economic statistics, tables and graphs aren’t just abstract concepts. Sometimes what they reveal results in policies that spill over into the streets. Such is the case in some countries in Europe.

Not so long ago, most forecasts were calling for further declines in the value of the U.S. dollar versus the Euro. To head off a collapse of its financial sector, the U.S. government has racked up huge debt. In two days of testimony before the Finance Committee of the U.S. House of Representatives, Federal Reserve Board Chairman Ben Bernanke has been making it clear that there must be a significant medium to longer-term plan in place reduce Washington’s budgetary deficit. The revenue shortfall is currently more than 10% of U.S. gross domestic product (GDP).

However, the situation has turned even more dire in several countries in Europe. These have been given the unflattering name of PIIGS, standing for Portugal, Ireland, Italy, Greece and Spain. With the exception of Ireland, they stand along the continent’s southern perimeter.

Greece

Greece’s position is most desperate of all. There is the possibility that Greece will default on its bond repayments, which may have a domino effect on the international banking sector. There is mounting suspicion that Greece will be unable to take the tough measures needed to clean up its mess. The true size of the country’s deficit is unknown due to questionable reporting practices.

Greece’s deficit is thought to stand at nearly 13% of its national output. Tough measures to reduce debt will require government spending cutbacks and possibly wage and price cuts to make exports more competitive. Specific belt-tightening measures will likely include increasing retail taxes, freezing pay and raising the retirement age. In response, workers have staged general strikes over the past two days. Greek bonds already carry a two percentage point interest-rate premium versus German bonds. Furthermore, international rating agencies such as Fitch have been downgrading the debt instruments of Greek banks. All of this raises the cost of borrowing.

Greece is said to operate with a huge black market economy that escapes taxation. Brussels would like to see a crackdown on this part of Greece’s economy that would tap into a new large potential source of government revenue. Rules for membership in the Euro club require countries to keep deficits under 4% of GDP. Lately, this has been waved due to the need for stimulus to break free from recession. Only Germany would currently be able to meet such a requirement. Germany is the only nation in Europe with the financial resources to come to the rescue of Athens. However, there are voices in Germany cautioning against such a move.

Italy, Spain and Portugal

Italy has an even higher deficit to GDP ratio than Greece. And a Prime Minister constantly embroiled in scandal, which is distracting when it comes to good governance, but that’s another matter. Workers in Spain are protesting planned austerity measures there as well. The unemployment rate in Spain is 20%. The government in Madrid is planning to lift the retirement age to 67. As in other countries, this is meeting with widespread disapproval. Finally, Portugal is also on the brink of general strikes. One is scheduled throughout that nation for next week.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

Related tags

Leave a comment

Or register to be able to comment.