Although Rajoy proclaimed 2014 is
the year of recovery for Spain it does not look as bright for the rest of
Europe. All of the European stock exchanges have shown this, with the exception
of the Spanish Stock Exchange closing 0.25% higher than it opened.
The situation in Europe is
unsurprising due to many reasons, one of which is the reconstruction of the
Banco Espírito Santo (BES) which not only caused panic in Portugal but as we
live in a globalized world, American markets were affected as well. BES had a
huge impact on the French bank Credit Agricole which wrote off 708m Euros,
almost halving their profits, which just shows how European countries and
business are linked. Nevertheless, the way in which the Portuguese authorities
are dealing with BES by dividing it into 2 banks, Banco Nuevo which will have
all the good assets and another bank which will hold all the toxic assets. The
idea being that the European taxpayer will not be hurt, but this means that the
shareholders and junior bondholders will be left with high risk assets.
Although this strategy saves the taxpayer it also might drive away future
investors who are interested in Portugal. Moreover, if this becomes an
exemplary outcome of how banks will be treated, this could be perceived as
anti-investor behaviour and drive away future investments in the region.
Recent statistics have not been
too positive with regards to the European economy. The Italian economy falling
back into a recession and the inflation in Germany being only 0.4% in July, thus
highlighting Europe's fragile state. Most importantly, for which the markets
haven't reacted too enthusiastically to is the decision by the ECB. The
decision to keep the benchmark interest rate at 0.15% and not introduce any
open market operations in order to combat inflation. There is a little detail
which seems to have been overlooked, the one the ECB has looked into, this is
the bonds market which are pricing Eurozone inflation at 0.5% for the next 5
years, then 2% for the following 5 years. Nevertheless, one needs to ask how
much longer until the Eurozone economy will turn back to normality, if the
crisis started in 2007 and we will keep facing inflation of 0.5% until 2019,
that means that only after 12 years of reforms, will the Eurozone economy start
growing again. A way to increase inflation is through monetary easing for which
the ECB hasn't introduced, which came as a shock. One reason for this is that
the Fed is doing its own quantitative easing (QE) and so there is plenty of
money going around the global economy (the impact of the Fed's monetary easing
is having an enormous effect upon the Latin American economies which in turn
make a lot of investments in Spain, so this is one of the many links that
connects the Fed's QE with Europe). More importantly is that the ECB doesn't
want to risk stagnation, given the high levels of unemployment (in Spain unemployment
is 24.47% and 27.2% in Greece) and so this creation of money might lead to
inflation but it will not lead to job creation. And so the real problem is the
lack of jobs rather than inflation. Regardless of the statistics, the ECB has
made the correct decision, and in the long-run European economies should grow
naturally, firstly through job creation which then should bring up inflation.
Furthermore, a more damaging
event is that of Russia, the sanctions which Russia has imposed on EU imports.
It has been estimated that €12 billion worth of agricultural exports have been
traded with Russia in 2013, thus being the EU's 2nd largest trade partner for
agricultural goods since 2003 (first is the USA). The imposed sanctions will
damage Europe but not as much as it seems, the reason being that the EU is
increasing its trade with other countries, mostly with Asia, exporting to China
has increased by 19.7% (from 2012 to 2013). And so, the EU does have other
options but it mostly depends on the demand by the other countries and let's
not forget the countries which Russia has imposed sanctions to will most likely
start trading with one another to make up for the excess in their trade
balances. Nevertheless, there is a big gap to fill, from the €12 billion
exported to Russia, the EU's next biggest exporter is China (with regards to
2013 figures) where exports are over €7 billion. And so will there be enough
capacity by other countries to take on the €5 billion gap?
The way around this is for each
country to stick to the advice that has been given to them by different
institutions, regardless of the short term effect and opinions of the citizens.
In the long run the imposed policies should be triumphant. A great example for
this is the case of Portugal, if it hadn't kept aside some funds in case of a
banking crises (which the IMF suggested) it would have ended up in a much worse
situation with the burden weighing down on the taxpayer. Therefore, although the world is in a
difficult situation, with the USA and Iraq, Israel and Palestine, Ukraine and
Russia, once all of these are overcome, then will the world move towards a healthier
economic recovery, when countries work together. However, at this point in
time, the near future does not seem to provide the right circumstances for
European economies to move forward at a reasonable pace, as the main issues
which need to be addressed are unemployment and trade.
