Paper doesn’t
refuse ink so those with the requisite skills are able to take a story and make
it sound positive or negative based on their own particular needs. Some would
call it spin, others may describe it as blatantly or deliberately misleading to
further their own aims but numbers or statistics are far more difficult to
manipulate.
Depending on what
and where you read your news, there is quite clearly a battle being waged
between pessimism and optimism about whether or not Europe is stuck in a
quagmire or marching back to growth and knocking every obstacle out of its way.
Both sides have strong and lucid arguments but strangely whilst one is
pessimistic and the other optimistic, they both agree on what needs to be done
and where the focus for a recovery is required, be that continued recovery or
the start of one – finance and lending.
Optimism in
Ireland these days is never in short supply. Property prices are increasing
nicely; positively streaking ahead in Dublin, the government is borrowing at
lower and lower rates and Fitch have most recently upgraded Irish Debt. All
appears well and whilst we are no longer careering towards ‘junk status, the
backdrop in Europe is far from rosy. Being complacent caused many of the problems
that we have been facing and being complacent and not cognizant of what is happening
in the wider global economies may see us caught unaware once more. While the rest of the world recovers from the Great Recession of
2008-2009, Europe is stagnating.
The numbers don’t
lie. This week’s figures for the euro-zone economy were far from healthy,
however you try to decipher them. An
already feeble and faltering recovery has stumbled. Output across the euro area
was flat in the second quarter, following a poor start to the year when the
single-currency club managed to grow by just 0.2%. Yes, there were some more
positive results, the Dutch and Portuguese economies, which had contracted in
the first quarter, rebounded, growing by 0.5% and 0.6% respectively. Spanish
growth picked up from 0.4% in the first quarter to 0.6% in the second. But
these performances were overshadowed by the poor figures recorded in the three
biggest economies. Italy, the third largest, had already reported a decline of
0.2%, pushing it into a triple-dip recession. France, the second biggest,
continued to stagnate. But the real blow came from Germany, the powerhouse of
the euro zone, where output slipped by 0.2%.
Should this be
cause for concern? Of course, the new GDP numbers are yet more evidence that
the euro-zone economy is in a bad way. Consistently low inflation has prompted
fears that Europe will soon slide into deflation. Prices are already falling in
Spain and three other euro-zone countries. Deflation is a real possibility and would
be particularly grave for the euro area because both private and public debt is
unrealistically high in many of the countries that share the single currency.
Even if inflation is positive but stays low it hurts debtors, as their incomes
rise more slowly than they expected when they borrowed. Not dealing with the
debt burdens that we built personally, as businesses and as a nation will
continue to come back to haunt us.
Access to capital
remains an issue for all and lies at the centre of a continued recovery, both
in Ireland and in Europe as a whole. Many of us remain concerned that Europe
has not moved as fast as the U.S. when it comes to the cleansing of balance
sheets of financial institutions. We want banks to bring their balance sheets
in order but also lend more money; the contradiction is difficult to ignore. There is a worldwide backdrop of banks
deleveraging but we expect them to write new business. It simply cannot and
will not happen.
Banks dominate
the provision of credit in the euro area unlike the U.S., where companies raise
much of their funding on the bond markets, concerns remain that not enough is
being done to improve lending In Europe. The stress tests are belatedly getting
the job done, but they still remain a powerful brake on lending until they are
properly completed. There will be no safe recovery until this is addressed.
So whether your
glass is half full or half empty based on what you see in Ireland, a lot of
what happens in the future will be heavily influenced by what is happening in
the rest of Europe. The numbers do not lie, it’s not as good as it may first
seem.
Nick leeson
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