Economic troubles continue in Europe

Europe’s economic problems from April have resurfaced this week, in what seems to be a constant swing of negative momentum between themselves and America.

Yesterday Spain had a massive 24-hour strike, Greece is battling with truck drivers, Portugal’s borrowing rates are reaching record highs, and Ireland’s government is under major stress thanks to a single bank.

Here is a snapshot of the PIGS’s economic situation.

Ireland

Ireland is in a real mess. After its ‘Celtic Tiger’ party ended thanks to the global economic downturn, the property market collapsed along with its third largest bank – Anglo-Irish Bank.

It was bailed out by the government in 2008 and its loans were divided into separate ‘good’ and ‘bad’ banks.

Today, the Irish government is expected to announce how much this bailout will cost. Most experts believe around €30 billion but some suggest it could be €35 billion.

As a result, government borrowing costs have reached record highs this week after rating agencies warned that a high bailout cost may mean less money for Anglo-Irish investors, or serious pressure on government finances.

The government’s spending deficit is already at 12% of GDP (total economic output) – similar to Greece’s – and with the bailout factored in could rise to a crippling 25%.

Government leaders have stressed that they have enough borrowed cash to last until mid-next year.

Nevertheless, to properly shrink the deficit they will have to cut public spending even more, which will further hurt ordinary Irish, economic growth (the economy receded last quarter by 1.2%) and the government’s tax take.

Spain

Yesterday, Spanish workers went on their first 24-hour nationwide strike in eight years that saw two-thirds on international flights cancelled and hospitals, public transport and various other businesses disrupted.

The strikes are over cuts to public sector wages, an increase in the retirement age, and changes that will make it easier to hire and fire workers.

The government is not in as bad a shape as other countries, but Spain has the highest unemployment rate in Europe at 20%.

Furthermore, a credit-rating agency Moody’s is expected to announce in the next two days that the Spanish government’s triple-A rating could get downgraded because of its financial situation, increasing the cost of its borrowing.

The spending cuts and tax rises for the wealthy are an attempt to stop that by showing that the government will be halving its budget deficit in two years.

Despite the regular strikes threatened by worker unions, the previously union-friendly government has indicated it will carry on with the necessary changes regardless.

Portugal

Portugal has the same problems as elsewhere – a growing public debt (86% of GDP) funding a loss-making government (9% of GDP). In fact, along with Ireland, it is seen as the weakest European economy after Greece.

The left-wing Portuguese government has struggled along as a minority government after members of their party split in 2009 to join an ultra-left party.

Since then they have been relying on votes from their centre-right opponents who have been largely supportive, until now.

In an effort to avoid a Greece-like crisis, earlier this year Portugal moderately cut public spending and increased taxes. But lenders in the financial markets have suggested this isn’t enough.

Therefore, the government has promised to pass more severe cuts and tax increases in their 2011 budget due in mid-October. But the previously-supportive opposition has said they won’t vote for anymore tax rises, despite the OECD recommending they do so.

As a result of this indecision, borrowing costs have gone up even more this week as lenders worry about Portugal’s ability to deliver on its promises to bring its government finances back to good health.

This will make matters worse for Portugal, already an uncompetitive country that has experienced low economic growth over the last decade.

Greece

For Greece, their problems lie in implementing the necessary changes in the face of repeated public protest.

This week rail workers were on strike for three days, shutting down international rail travel. But the biggest battle remains with truck drivers.

One of the lending conditions from the IMF is that Greece starts selling trucking licences to non-Greek companies to bring transport prices down. Until now, licences have been sold only to Greek drivers and are difficult to get.

This is infuriating truck drivers, who paid a lot of money for their licence (often mortgaging their houses to do so) on the promise that they will get long-term guaranteed income due to a lack of competition.

The drivers are demanding compensation, but the government can’t afford to pay them.

These are the problems facing Europe at the moment. And whether it’s impoverished governments or disruptive politicians, striking workers or nervous lenders, it all spells extremely weak economic growth and painful times ahead.

By The Casual Truth