Euro-Zone Budget Deficits Go Parabolic

While the topic du jour, every jour, has been Greece and its whopping budget deficit, fiscal problems within the Euro-Zone hardly end there.

Athens' budget deficit, which ran at 13.6% of Gross Domestic Product (GDP) in 2009, is not the highest in the bloc.  Ireland had the biggest fiscal deficit in the European Union last year – larger than both Greece and the UK - according to revised figures published recently by Eurostat, the European Commission’s official statistics office.

The deficit was revised up from 11.8% to 14.3% of GDP after Eurostat ruled that the Irish government’s €4 billion of aid to Anglo Irish Bank must be treated as part of current spending.

Ireland has raised approximately 60% of the €20 billion it needs this year to finance the deficit.  Its repayment schedules are manageable with around €1 billion of redemptions due this year, €4 billion next year and €6 billion in both 2012 and 2013.

European Commission's spring forecasts put the UK budget deficit THIS year at 12% of GDP – the highest projected within the European Union and worse than Treasury estimates.  The deficit, if realized, would put Britain at the highest deficit of the 27 EU nations.

The country's budget shortfall was the third largest in the EU last year, but will overtake both Greece and Ireland this year, according to the forecasts.  Greece's measures to tackle its public finances problems are projected to reduce its deficit to 9.3% of GDP in the coming year.

The commission's forecasts are for a worse deficit than predicted by Alistair Darling at his March budget.  In 2010-11, the commission puts the deficit at 11.5% of GDP, compared with Darling's forecast for an 11.1% budget gap.

Even Germany, easily the healthiest economy in Europe, is finding itself struggling.  Germany's budget deficit will soar well above 4% of GDP in 2010, breaching European Union rules, Finance Minister Peer Steinbrueck was quoted as saying on Wednesday.

Under the EU's Stability and Growth Pact, Euro-Zone members are required to maintain public deficits below 3% of GDP and public debt at less than 60% of GDP.

This sharp increase in deficit spending stems mainly from the stimulus package enacted by Chancellor Angela Merkel.  At €50 billion,  it is the largest since 1945.

Unfortunately, budgets are far easier to expand than contract.  Politicians have a vested interest in their own re-election and nothing works better than promising something today while postponing the cost for future years.  Austerity measures are never embraced by the domestic populations - keeping even the honest politicians from imposing these fixes.  The recent riots and violence in Greece is proof that an entitled populace is loathe to take responsibility.

Marko's Take

Our latest You Tube video entitled "Social In-Security:  The Problem" is now posted.  You can access it by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.

More Euro-Zone Problems: Who's Next?

Yesterday, we discussed the acute and growing problems in Greece (http://markostake.blogspot.com/2010/03/greek-crisis-threatening-global.html).  Sadly, the problems in the Euro-Zone are showing signs of spreading. 

Portugal's sovereign debt was just downgraded.  Sentiment soured towards the Euro after rating agency Fitch downgraded Portugal’s credit rating to AA- from AA.  Fitch cited “significant budgetary underperformance in 2009” and “structural weaknesses”.

Ahead of the announcement, the Euro was already under pressure as hopes faded that this week’s two-day European Union summit, which starts on Thursday, would result in a concrete pledge of financial support for Greece.

Germany said for the first time, that it would consider financial support for Greece, but pegged its support to 3 conditions.  First:  Greece would have to explore any alternative options to attempt to gain access to the credit markets.  Second:  the International Monetary Fund must be a significant participant to the rescue, and Third:  any potential aid package must be accompanied by additional means of verifying strict compliance.

The growing uncertainty has raised speculation of a temporary Greek exit from the euro-zone to address the currency issue, which would put further pressure on the single currency.

In Great Britain, banks were told to expect “payback time”, as Alistair Darling, Chancellor of the Exchequer, put the finishing touches to a budget that intends to propose new bank taxes and force them to improve the way they deal with customers and small businesses.

The Chancellor’s pre-election budget on Wednesday will employ tactics to force the banks to repay society for the damage inflicted on the economy over the past two years.  Lord Myners, City Minister, set the tone on Tuesday when he said: “The taxpayer rescued the banking system 18 months ago.  The time now is for payback.”

Treasury officials say they no longer “trust the banks as much” to deliver on promises to voluntarily improve their level of service and that the budget marks an attempt by Mr Darling to treat them more like a utility.

He is expected to announce measures to improve service to small enterprises, amid a myriad of complaints about both the onerous rate of charges and difficulties in obtaining credit.  Business organizations are confident the budget will include a mechanism allowing entrepreneurs to challenge adverse lending decisions, or rises in interest rates.

The inter-connectivity of the global financial system makes dealing with individual country's interests quite problematic, as the result of the spill-over into other countries.  The most frightening aspect of the situation, BY FAR, is that the number of problem countries grows as the proportion of "healthy" countries countinues to shrink.

Marko's Take

Please visit us on YouTube at http://www.youtube.com/markostaketv.  We will have our next episode on the legality of the Personal Income Tax posted within the next several days.