When Greece’s creditors announced earlier this month that they would release €49 billion worth of aid to the beleaguered nation over the next three months, including an immediately needed €34 billion (Rs 356,000 crore), Greek Prime Minister Antonis Samaras was quick to point to the significance of the deal.
The prospect of a Greek exit from the Euro Zone was now “dead” he declared, lauding the huge sacrifices and strides his country had made in recent months in order to meet the creditors’ stringent demands.
RETURN OF CONFIDENCE
While his confidence may be somewhat overstated (even the country’s finance minister acknowledged in a Financial Times interview earlier this week that a “Grexit” remained a possibility) his comments underlined the fact that the worst fears about the region’s prospects appear to be receding for now.
“For much of 2012, the Euro Zone stood on the edge of an abyss, with real fears of a break-up caused by the strains of the debilitating debt crisis. But it has stepped back from the brink — at least for now,” noted HSBC in a recent piece on Europe’s prospects for 2013.
Its assessment highlighted the tentative steps towards further economic and monetary integration for the region, in particular moves towards a banking union, the appointment of a pan-European supervisor for the banking sector, the Greek developments, and the European Central bank’s historic pledge to do “whatever it takes” to preserve the euro. This could be crucial to maintaining confidence, should political developments in the new year threaten to scupper any national austerity drives.
As for Greece itself, Standard & Poor’s recently upgraded its credit rating from “selective default” to B- with a stable outlook, citing the government’s own efforts as well as the support of other Euro Zone leaders.
“There is evidence we had the worst in 2012, especially the second half of the year when confidence indicators reached their bottom,’ says Christian Schulz, a senior economist at Berenberg Bank, who argues that Europe’s southern nations have achieved the needed austerity drives for the year.
“The key story for Europe is that it has done the austerity it needs to in 2012 and though it has some to do in 2013, it has done so in a very front-loaded way — with lots of pain, but it has done it very quickly.”
The austerity and reform programmes embarked upon by many European nations have left some with “additional fiscal space” that would allow for debts to rise even further before reaching critical levels, noted Moody’s Analytics in a recent research paper. While the region would be in recession for most of 2013, “reasons for cautious optimism are emerging,” the paper concluded.
UNEMPLOYMENT PERSISTS
Of course, the return of confidence will do little to ease the pain for much of the Euro Zone’s population: unemployment, which already stands at 11.7 per cent, is likely to continue to rise even further, peaking at over 20 million next year, according to Berenberg’s Schulz.
This figure masks huge variations across the region. The jobless rate in Germany has risen slightly but remains relatively low at just 6.9 per cent.
By contrast, over 25 per cent of working-age Spaniards are unemployed, and the figure is likely to rise to as much as 27 per cent next year, according to Raj Badiani of IHS Global Insight. He argues that the top-line growth figures — GDP is expected to contract by 1.6 per cent next year, from 1.2 per cent in 2012 — mask the depth of the recession, including very weak domestic demand and steadily falling house prices. “I would argue that using the term recession for Spain is not precise enough…the country has many depression-like characteristics,” he says.
The EU is the only major region of the world where unemployment is still rising, the European Commission said recently, adding that long-term unemployment levels had reached “alarming heights,” with more than one in five young people in the region now unemployed.
The worsening conditions will leave a large element of political risk for the region. Badiani argues that while the Spanish government has the necessary majority to stick to its current austerity agenda, further social unrest could make it harder to implement changes still on the agenda.
“There is a clear risk that we could see more tensions and see unrest worsening, particularly in Southern Europe, which would bring us to the “break it or pay it” moment for rich countries,” observes Carsten Brzeski, a senior economist at ING Bank. “Are they willing to do more of the burden sharing?” he asks.
With elections looming in Germany and Austria next year, where the extent of support being given to southern Europe is already a matter of great domestic controversy, this would be a tough call.
And then there’s the risk presented by unexpected political twists, such as the recent return of Silvio Berlusconi to the Italian political stage. His recent conviction for tax fraud has done little to dent the political aspirations of this playboy billionaire, who has mooted the possibility of standing in the general elections due to take place in the early part of next year on an anti-austerity platform.
While Italy has made steady progress in cutting its debt levels, considerable work still needs to be done, and getting a government willing to continue to pursue this is far from guaranteed, says Badiani.
And of course there’s the chance that the predicted recession could be even worse than feared. Over the course of the past year, growth forecasts for the region in 2012, including by the European Central Bank, have been repeatedly revised downwards.
2012 was a year of high drama for Europe; at points the union seemed to hang on by a thread. 2013 is likely to be a lot less dramatic but no less ugly — with political uncertainty and tough times ahead for its population.