Wednesday, May 18, 2011

Spreading infection

Europe's economies

Spreading infection

by The Economist online

THE fear that Greece's sovereign-debt crisis might presage similar episodes elsewhere in the euro zone has been borne out. In November, Ireland joined Greece in intensive care, becoming the first euro-zone country to apply for funds from the rescue scheme agreed in May 2010 in concert with the IMF, and in April this year Portugal became the third country to require a rescue. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) are now much higher in all three of the bailed-out countries then they were in May 2010. Promises to tackle budget deficits through public spending cuts and tax increases have offered little reassurance to bondholders, who know that austerity will take its toll on growth.

The interactive graphic above (updated May 17th 2011) illustrates some of the problems that the European economy faces. GDP picked up in most countries through 2010 but there were marked differences in performance. Germany was especially sprightly: its economy expanded by almost 5% in the year to the first quarter of 2011. But GDP in Greece has crashed under the weight of austerity; Ireland contracted sharply in late 2010; and Spain’s economy is barely growing.

In many countries unemployment has not gone up by as much as one might expect given the depth of the crisis. Germany now has lower unemployment than before the crisis, thanks in part to a short-time working scheme and flexible time arrangements in its manufacturing sector. The worst-affected countries include Ireland and Spain, where a collapse in construction has swollen the dole queues. Britain has fared better because its tight planning laws limited the growth of its construction sector during the global housing boom.

Weak growth and high unemployment spell particular trouble for countries that already have high levels of public debt. That explains why Greece was first to lose the confidence of the markets with a public-debt-to-GDP ratio of 127% and a budget deficit of 15.4% IN 2009, making it the euro zone's outlier country. Both Ireland and Spain had low public debt coming into the crisis, but a combination of recession and big housing busts blew a hole in their tax revenues. Ireland was, in the end, undone by fears that the state could not backstop its banks. Others are pruning before the markets exert real pressure: Britain's debt has the longest maturity of any EU member but it is still aiming to get its finances in order within four brutal years.

AUDIO: Our correspondents on why struggling euro-zone economies should restructure their debt sooner rather than later.

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