Is the eurozone crisis over? The Germans think not…

There was an interesting poll in today’s FAZ conducted by INSA for Bild on whether Germans believe that eurozone crisis is over or not.

The results were pretty comprehensive with 81% saying that they do not believe the crisis is over compared to 7% who do.

Furthermore, 34% of Germans believe that Greece is on the road to recovery compared with 39% who believe the country has not done enough to reform its economy. Clearly they remain very unconvinced by the efforts of the Greeks.

In the same vein, Eurostat this morning put out its first estimate of the debt and deficit figures for the end of 2013. As might be expected they don’t make particularly pretty reading. As the graph below highlights, the debt levels in many EU countries have continued to increase and by substantial amounts in Cyprus, Greece and Slovenia – all due to bank bailouts/recapitalisations.

With debt levels continuing to rise and the long term structure of the eurozone still developing it remains premature to cast the crisis as over - at least the Germans seem to think so.

Debt problems in Europe extend beyond the headline figures

On Monday, Eurostat released its latest figures on public debt to GDP, which soared to a record of 92.2% in the eurozone in the first quarter of this year. Of all the eurozone members, only Germany and Estonia were able to reduce their debt levels in the first three months of 2013, while in total five eurozone members had debt-to-GDP over 100%.

High government debt is obviously a well-covered issue and a well-known problem in the eurozone. However, the debt problems extend well beyond this simple figure - we've touched on this previously, when looking at the level of financial sector debt and the need for a eurozone banking union. Another potentially interesting aspect of the debt problems relates to what is known as 'implicit debt'. This is an estimate of the future debt which states will accrue including contingent liabilities such as pension payments and welfare payments (many of which are, at this point, unfunded). 

In that vein, we thought it would be worth looking back at an interesting study produced by German think tank Stiftung Marktwirtschaft in coordination with academics at the University of Freiburg at the end of 2012. They've had a go at calculating the level of 'implicit debt' in the EU and what it means for debt sustainability. The results are laid out in the table below.

('Implicit debt' is calculated using data on future GDP growth as well as on the long-run change in age-dependent expenditure, using the European Commission’s reports on ageing, all done assuming no policy changes and put into 'present value' terms).

As with any such calculations, there are numerous assumptions and we must be wary of drawing grand conclusions, but the results provide some interesting points nonetheless. At the bottom of the debt sustainability ladder, we see the usual suspects such as Greece, Cyprus, Spain and Ireland (raising some questions about how effectively it is really recovering from its crisis). Slovenia, a country which we warned may be in line for a bailout, also finds itself in trouble by this metric. Surprisingly, Luxembourg fares very badly; the authors suggest this is down to its "generous" pension system which has not been overhauled to deal with future demographic developments.

It may also surprise many that Italy ends up top of the table. The authors suggest that this is due to the fact that the country "expects only a small rise in age-dependent expenditures as a proportion of GDP." Italy admittedly made quite an effort already in reforming its pension system (in the 1990s and more recently under Mario Monti's technocratic government) but this outcome does seem fairly optimistic, not least because it is reliant on Italy maintaining a long term growth level of close to 2% per year.

All that said, another study, by Société Générale, on the topic of "unfunded liabilities" relating to pension and welfare costs, places Italy's at 364% debt of GDP suggesting it is better off than France (549%) or Germany (418%). Similarly, by the SocGen method, Spain would only have a burden of 244% to GDP, showing that a lot depends on the precise calculation and what is included. Perhaps a bit worryingly, the UK is doing worse than most eurozone countries in both calculations.

According to Johan Van Overtveldt, the editor-in-chief of Belgian magazine Trends who flagged up these results, "These figures are taken very seriously by the ECB". With regards to Italy, he warns that "an increased interest rate or a continuing recession (or a combination of the two) can quickly and drastically overturn this positive image".

In any case, these figures provide some added depth to the on-going debt issues in Europe and debatedly provide a slightly more complete picture than the simple headline debt to GDP figures. As we have noted before, though, this is simply one aspect of the varied and complex eurozone crisis which extends beyond just government debt to the banking sector and international competitiveness (to name but a few areas).

Spain's credibility suffers another blow as Eurostat spots some creative accounting

Two weeks ago, we noted on our blog that the Spanish Tax Agency had delayed around €5bn of tax refunds (due in December 2012) deferring payments to January 2013 instead. This contributed to Spain missing its EU-mandated 2012 deficit target (6.74% of GDP, instead of 6.3% of GDP).

We wondered whether the sudden increase in tax refunds (up by 82.8% in January 2013 compared to previous year) would not lead the European Commission to start asking some question. Sure enough.

The EU's statistics office Eurostat has asked Spain to raise its 2012 deficit to 6.98% arguing that Spain was not correctly accounting for tax refunds. Basically, Eurostat rules say tax refunds have to be counted towards the deficit when they are claimed by taxpayers. Spain only includes them when they are paid out.

This means Spain will have to retroactively revise its deficit figures, going all the way back all to 1995. The difference for 2012 in itself is not huge. And Spain remains unlikely to face sanctions, as the European Commission has now shifted its focus to 'structural' deficit, but not inspiring confidence.

In an official note published yesterday, the Spanish Budget Ministry tried to blame Eurostat for the revision of the deficit figure, saying it was due to a methodological change "demanded by Eurostat over the past few days".

But according to a spokeswoman for EU Tax Commissioner Algirdas Semeta quoted by Expansión,

"Eurostat hasn’t changed its methodology or its rules. It has simply found out that the methodology used by Spain was incorrect."

Eurostat has realised this only now because,

"The [spending] pattern suddenly changed…when Spain moved to January 2013 certain payments due in December 2012." 

Eurostat will publish its final deficit figures on 22 April. Spanish Budget Minister Cristóbal Montoro said this month that, if anything, the 2012 deficit figure of 6.74% of GDP would have been revised downwards. He's been proved wrong once. He can only hope it doesn't happen again.  

French economy: "Bienvenue au Club Med!"

France’s National Statistics Institute (INSEE) and Eurostat have both confirmed that the French economy shrunk by 0.3% in the last quarter of 2012 - and according to INSEE the economy registered zero growth throughout 2012. President François Hollande is expected to soon revise down his painfully optimistic growth forecast of 0.8% for 2013. In the meantime, if anyone had any doubt as to what these figures mean for France, a comment piece on the front page of today's Le Figaro does the trick:

 

Hollande can always seek consolation in the fact that the figures for the rest of the Eurozone were pretty grim as well....

Another unwanted record in the eurozone...

Yesterday’s unemployment figures from Eurostat made a surprisingly big splash in the European press today. We say surprising since for anyone following the crisis this has been a longstanding and deeply concerning trend in the eurozone.

Eurozone unemployment reached a record high of 11.8% in November (up from 11.7% in October), while youth unemployment reached the staggering level of 24.4%, meaning almost a quarter of young people in the eurozone are out of work.

Looking deeper at the data, there are a few important points to consider:

The current trend runs counter to the majority of forecasts by the Commission and the IMF. We’ve discussed this before with regards to Greece, but it also holds for Spain, Portugal and many others. Although the pace of increases in unemployment is slowing, it has not yet stopped and with austerity set to continue across the eurozone it seems unlikely to do so at any point this year. Despite this, many of the forecasts show unemployment stabilising at or near current levels – this data highlights that this remains unrealistically optimistic.

There remains huge divergence between the stronger and weaker countries. With Austria posting unemployment of 4.5% compared to Spain’s 26.6%, the talk of the eurozone crisis being over seems rather pre-emptive. Fundamental divergences remain between the countries, with no clear mechanism for correcting or managing them yet being discussed at the highest level.

The increase in long term unemployment is becoming increasingly concerning. In the second quarter of 2012 it reached 5.2% in the eurozone, but topped 13% and 10% in Greece and Spain respectively. This has the ability to significantly harm the potential productivity of these economies and become a significant drag on (already low) economic growth. As with the wider figures it drives home the need for strong structural reforms, particularly to education and retraining programmes.

It’s also worth keeping in mind that this is happening at a time when growth is stagnating and public spending is falling sharply, meaning that the fall in standards of living for many people could be substantial – as we have pointed out before this has the potential to be a toxic mix in what is already a very politically divisive crisis.