By David Cooper, Fund Advisers Europe
The debt crisis affecting Europe is coming to the make or break point. Often called The Sovereign Debt Crisis, the problems that started at the end of 2009 are at a point where a resolution, of some sort will be found.
European leaders will decide today how much they want to save both the European Monetary Union, and ultimately the Euro.
The Sovereign Debt Crisis – caused when a country that has run out of money to pay back the loans it has taken out in the past and is therefore being refused loans for the future – started two years ago in Greece. It has gone on to affect Portugal, Ireland and Spain.
The effects are now being seen in the government bond markets of Italy, and even in France, with higher interest rates being applied by those lending money to these countries. They are viewed as having shown that they could default so are now not seen as a good risk, and are therefore charged more for loans via bond issues. Much the same as someone who has failed to pay back a past mortgage would be refused, or charged more for a loan in the future.
A country that cannot borrow money at a competitive rate will see investments into its economy drop and a downward spiral can follow leaving a country close to bankruptcy and needing to accept ‘bail-out’ money. Whilst taking bail out money is not necessarily a bad thing, the knock on effect of reduced confidence levels in the economy and lenders not believing the country can pay back its debt and to continue to function, can and often has, led to recession.
The difference this time is the number of countries that could be affected. This spread has been accelerated by the simple fact that all the efforts to fix this have, so far, failed.
A year ago it was hoped that the billions poured into Greece by its Eurozone partners, and to a lesser degree the IMF, would contain and eventually reverse the situation.
This has not happened.
Failings in the structures of the EMU are that it does not give countries the mechanisms needed to manage their own finances. Smaller countries must try and achieve the targets set centrally, and they have struggled to meet these.
With the strict and rigid frameworks that are imposed by membership, simple measures like changing internal borrowing rates to manage inflation are removed from the governments and instead controlled by the Central European Bank.
Couple this with a lack of effective immediate consequence for failing to manage fiscal measures, there is little incentive to act until things get so bad disaster is all but inevitable.
Or, to put it another way. Countries did not save when times were good before 2008 and are now paying the penalty!
The public spending cuts that have been forced on Portugal, Ireland, Greece, Spain and now Italy have been the inevitable. They have no way to raise the money they need to pay the pre-crisis levels of public spending, so must save money on these bills.
At every stage of the crisis politicians have failed to look beyond the current problem and have remained reactive to the problems, failing to take a proactive stance to plan effectively for the future. This is because their jobs ultimately depend upon the electorate who simply do not have the stomach to see their tax revenues continually pledged to foreign states to stem the tide of failing economies.
However, not all is bad. Some countries have prospered as a result of the debt crisis.
Net exporters like Germany have seen the price of their exports fall at the start of 2010 giving them a head start against other countries coming out of the 2008/09 recession. Greece has been good for them.
Is this a reason for the apparent German reticence to assist further? A drop in value for the Euro would certainly help their balance sheet, as long as the Debt problems do not affect them directly, which is doubtful.
One solution would seem to be greater regional support to provide reassurance for an individual nations economy. This could be used to lessen the impact of painful austerity measures, and if pre-arranged removes the problems around being seen to take a bail out payment.
If the politicians succeed in this, the Euro and the Monetary Union will become what the instigators envisaged. A single economic power spread across Europe.
If they fail, it could well fall apart and spell the demise of the Euro as we know it.
If you want to find out more about how all this will affect you living here in Switzerland or France, please contact Fund Advisers at the address below:
Fund Advisers Europe
Rue de Contamines 35
1206 Geneva
022 347 00 52
www.fundadvisers.eu
This email address is being protected from spambots. You need JavaScript enabled to view it.
Author Bio
David Cooper is a Director of Fund Advisers Europe, a Financial Services company offering a broad range of Investment and Insurance Services to clients across Europe and Latin America. The majority of David’s early experience was gained by working for Lloyds Bank in the United Kingdom. David now has over 20 years' experience growing wealth management brokerages throughout Europe, the Caribbean and Latin America. The primary objective of his role at Fund Advisers is the creation of growth in Fund Advisers’ Wealth Management & Discretionary Fund Management division. David lives in Geneva with his family.
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