Wednesday, July 24, 2013

Europe's Looming Day of Reckoning

The kerfuffle over Europe's sovereign debt levels has died down to the point where it barely makes the pages, virtual or otherwise, of the mainstream media.  Unfortunately, as you will see, the problem has not gone away despite the imposition of much hated austerity measures.

Figures from Eurostat show that at the end of the first quarter of 2013, the government debt-to-GDP ratio in the euro area (the 17 nations that are using the euro as their currency or EA17) stood at 92.2 percent compared to 90.6 percent one quarter earlier.  In the EU27 (the broader Europe), the ratio rose from 85l2 percent to 85.9 percent from the last quarter of 2012 to the first quarter of 2013.  If we look back one full year, the EA17 debt-to-GDP level rose from 88.2 percent to its current 92.2 percent and the EU27 debt ratio rose from 83.3 percent to 85.9 percent.  This cannot be termed as "healthy" in any way and seems to be heading in the wrong direction.

Here is a chart showing the overall government debt in euros, debt-to-GDP ratio and the composition of the debt for both the EA17 and EU27:

The total government debt for the EA17 is a massive 8.750 trillion euros, equivalent to $11.55 trillion (U.S.).  The debt grew by 406 billion or 4.9 percent in just one year, well above the overall "growth" rate of the economy which actually contracted by 0.9 percent on a year-over-year basis from the fourth quarter of 2011 to the fourth quarter of 2012 as shown here:

My, doesn't that look unhealthy!

Here is a bar graph showing which European Member States are the worst debt offenders:

Of all 27 Member States, 24 saw their debt-to-GDP levels rise on a year-over-year basis with the worst of the worst being:

Greece - plus 24.1 percentage points
Ireland - plus 18.3 percentage points
Spain - plus 15.2 percentage points
Portugal - plus 14.9 percentage points

The three Member States that saw their debt-to-GDP levels shrink were:

Latvia - minus 5.1 percentage points
Lithuania - minus 1.9 percentage points
Denmark - minus 0.2 percentage points

Here is a bar graph summarizing the changes in government debt ratio levels from the first quarter of 2012 to the first quarter of 2013:

While Europe's debt crisis appears at first glance to be on the back burner, the recent data from Eurostat suggests that it could soon be 2010, 2011 and 2012 all over again.  It also suggests that the massive intervention from central banks across the Eurozone bought little more than a time delay.  As economists have noted, the current ultra-low interest rate environment brought to us by a central banker near us has accomplished two things:

1.) Allowed governments to spend more than is prudent.
2.) Allowed governments to acquire more debt than is prudent.

The day of reckoning for Europe looms large.


  1. The underlying problem is the current form of democracy that we have. As long as we encourage those that receive direct financial benefits from government, whether by social assistance or pay cheque, to vote, the end result will always be the same. Bankruptcy.

    In Canada, 40% pay no income tax, 20% receive a pay cheque from the government and effectively pay no tax, leaving just 40% to fund everything for everybody.

    If only those that pay income tax or property tax and do not receive social assistance or work for the government, voted, we'd have balanced budgets more often than not.

    1. erm.. what you would have is half the population living in poverty without education and without a way of getting out of poverty. The UK already had a system in the past where only land-owners could vote (male land-owners). It results in an entrenched society of rich and poor with no social mobility.

  2. A few paragraphs near the end of a recent story about European and Italian politics hit on a far more important part of reality. In Cyprus, the newly elected President Nicos Anastasiades was rocked in his first month in office by a banking crisis that brought the euro zone to the brink. He has been forced to shepherd a new bailout agreement through a skittish Parliament that rejected the first one. In Greece, the coalition government of Prime Minister Antonis Samaras, still less than a year old, is boasting that his country is now projected to turn the corner on debt next year in spite of the fact that these projections have never been accurate in Greece or anywhere else in Europe, the economy continues to sink. More about why this is far from over can be found in the post below,