Last week saw in a whole raft of very disturbing news. Once again disaster was on everyone’s lips while others said “I told you so”. In the eye of the storm was the news that Sicily and Valencia needed bailouts and that the yield on 10 year Spanish bonds had risen to 7.75%. Spain is days’ away from bankruptcy and will be forced to ask for much more help than before – probably around three to four hundred billion euro in order to finance the country’s basic needs.
All eyes are now on Italy where premier Monti’s declining popularity will shortly turn into a serious economic problem. He has introduced a number of essential and unpopular reforms, but six months after his team of experts took over the helm, the markets are once again demanding the same bond rates as at the end of Berlusconi’s reign. Hence the question going around Italy now is “what was the point of Monti, sweat and tears if nothing has changed since Berlusconi?” As I have said many times, the crisis is more political than economic because economic growth all depends on political resolve. Italy’s problem is that there were no parliamentary elections resulting in a pro-reform majority, for against this backdrop of shrinking approval ratings, the government will find it increasingly difficult to get Parliament to approve any reasonable measures while markets expect a drying up of liquidity as is currently the situation in Spain. At least a year will have to go by before the fruits of Monti’s reforms can be seen.
Fresh elections will not be enough, the only things that matter are the speed and depth of reforms. The Spanish government is at last making the right changes but it is almost half a year too late. The markets no longer believe that these reforms will spur growth in the short term. No one is expecting any green shoots in Spain for at least two years. The economy is falling into an ever deeper recession – the end of bad bank debt is nowhere in sight, not to mention the financial problems facing Spanish regions. The autonomous regions account for almost 40% of public finances. For years the banks and the local authorities benefitted from the property boom but with today’s shrinking market they are both experiencing ever greater losses. It is difficult to expect that in the short term this trend will change in any way. However this time around, compared with Greece or Portugal, the sheer scale of the financial problems is impressive. Things have just got worse … again.
Last week a member of the ECB Executive Board and then its President indicated how serious things were when they said that the ECB will defend the euro at all costs. The director of the Austrian central bank and the deputy director of the ECB suggested granting the ESM a banking licence which was seen as showing the way in which it would be legally possible to finance indebted countries while using the mechanisms exclusive to the ECB. President Draghi went even further, saying plainly that he will do everything possible to save the common currency. The market is looking purely at short term liquidity and this can only be granted in unlimited quantities by the ECB. But that will still not solve the basic question about the prospect of growth in Europe. This is a problem that the ECB will definitely not manage to solve. This is in the hands of politicians and will depend on their resolve in implementing difficult supply-side reforms.
In Poland one gets the impression that for many decision makers, the broader perspective got overshadowed by Euro 2012. Recent comments by some of our politicians make it sound as if they had only just realized that the economy really is slowing down. Some confusion about statistics produced an unusually warm final quarter for 2011. Moreover the economy was artificially stimulated by infrastructure spending which has now fallen off considerably. This is also the cause of the problems in the construction sector where it is estimated that in two years’ time building demand could be met by a construction sector which is a third of its current capacity. What counts most for the authorities however, is that a slowdown in consumption and a feeble increase in investment have an adverse impact on budgetary inflows which not everyone had expected. Most probably next year will be worse than this one which makes it crucial to amend the 2013 budget. Poland should be more committed to the rescue of the european project because it does concern us. The relationship between the Spanish and Polish economies is much greater than one might imagine. Especially when it comes to trade via Germany. Meanwhile last week Germany for the first time glimpsed the prospect of having their rating cut. In Poland, when contemplating emergency measures, it is not enough to focus on tax hikes and a reduction in investments. We have to also have to examine spending and speed up privatisation. In this the Elewar scandal should help.