Europe’s austerity packages start to bite

EU austerity Oct11.pngIts the ‘big picture’ issues that we need to watch these days, no longer detailed forecasts of individual product growth rates. They are driving chemical product sales in every major region.

The chart above from the Financial Times highlights Europe’s drive towards austerity. Long gone are the days of the 2009 G20 meeting, when everyone focused on stimulus spending. This year, austerity packages will hit household income in most countries:

• Greeks lose 14% of their income, €5600 ($7600)
• Ireland and Portugal lose 5%
• Spain loses 5%, and Italy 3%
• Even the average German household will lose 1%

And, of course, Europe will likely see bigger cuts next year, and higher taxes, to help pay for current deficits.

Equally, there are no easy ‘solutions’ to today’s crisis. Recapitalising Europe’s banks, the most urgent task, will mean banks lending less – as higher reserve levels will reduce their lending ability. That will push some businesses into bankruptcy.

Similarly, Greece’s default will hit French and German banks hard. So they will need even more capital. If they don’t have enough, then the market will worry more about their lending to Spain and Italy. But this could easily become a vicious circle – if France puts in a lot of capital to protect its banks, then it could lose its own AAA rating.

And, of course, there is also the political dimension. Instead of trying to lead the debate, France and Germany have tried to put off the hard decisions. President Sarkozy faces election next year, and Chancellor Merkel in 2013. They now fear, probably rightly, that voters will throw them out if they agree to pass more money to Southern Europe.

Equally, as with President Obama in the USA, neither leader really seems to understand the economic issues involved. Instead, they all continue to defer to the same advisers whose policies have led to the current crisis.

Sadly, therefore, it seems the only real area of doubt about the outlook is around just how bad the downturn will be, and how long it will last.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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