Skip to main content

The Domino Effect...

The widespread slashing of budget deficits could plunge Europe and the world into a second recession...


Let's go over to Rome to hear the vote of the Italian jury. "€26bn in cuts over two years, including savage reductions in health spending and road building." And now it is over to Spain. "Good evening, Madrid. €15bn in spending cuts over two years? Thank you Madrid." Paris? "€5bn in cuts over two years." Athens? A punishing €30bn over three years, on top of previous cuts. Good evening to London, where a new coalition jury has just gathered. "£6.2bn of cuts in the present tax year with much, much more to come."

The sound of screaming and howling that can be heard all over Europe resembles a European Cuts Contest.

In the last two weeks, almost all EU governments have been slashing their budget deficits in order to prop up stockmarkets, blunt attacks on the euro and the pound and discourage the kind of speculation on sovereign, or national, debt which almost drove Greece to the wall. The cuts are supposed to reassure the financial markets that European governments take their whacking deficits and gargantuan accumulated debts seriously.

The EU's 27 governments have a total accumulated debt of nearly 80% of the union's annual economy – about €9.5 trillion. Their projected total budget shortfall this year is 5.6% of GDP – or about €600bn.

Some countries are much naughtier than others. Greece, after three rounds of cuts, has reduced its projected deficit this year to 4% of GDP, but its accumulated deficit is 125% of its annual income. France has a projected deficit of 8% of GDP this year and a total debt of just over 80% of its national income. Britain, before last week's cuts, had a projected deficit of over 12% and a total debt of just under 80% of GDP. Even virtuous Germany has a deficit of 5% and accumulated debts of almost 80%.

It is important to remember how some of those figures came to be so alarmingly high. In 2008-09, national governments bailed out banks and opened public-spending taps to prevent the world from sinking into depression. The figures given above for accumulated debts are, broadly speaking, the fruit of the combined sins of many years. The annual deficits have been, in many cases, doubled by the recent efforts to rescue the world economy.

There are many voices – including Dominique Strauss-Kahn, president of the IMF – who fear that the race to appease the markets by making severe public spending and deficit cuts may plunge Europe, and the world, back into a second recessionary dip. But governments fear they will be damned if they do cut and damned if they don't.

A Europe-wide sovereign debt crisis would threaten to destroy several large European banks which hold thousands of billions of euros of national debt. There would be no money to bail out these banks a second time around. The ironies do not end there. The 2008 crisis was largely caused by similar speculation by banks and other market players on other forms of debt. Broadly speaking the same people are now complaining (or trying to profit from the fact) that the money spent to rescue them last time has left national governments dangerously indebted. Having speculated on a possible Greek default, they have switched to Spain, and may turn their sights in the near future on France and Britain.

German chancellor Angela Merkel and French president Nicolas Sarkozy, have been ranting about the destructive actions of market speculators. At one level, it could be argued that the markets have performed a useful function in forcing the EU to tighten weak rules and structures sustaining the euro and in forcing European capitals to face up to the consequences of permanent deficit financing.

But Merkel and Sarkozy have a point. There has been something more than usually perverse about the trading departments of banks and other institutions speculating (again) in a way that threatens (again) to bring down the world banking system and the world economy.

France

France has promised to cut its 8% GDP deficit to 4.6% by 2012.

● Paris has promised €5bn in spending cuts over two years, partly by squeezing grants to local government.

● Another €90bn in cuts or tax rises are needed over 30 months but the government has given no clues to its plans.

● To rescue the bankruptcy-threatened state pensions scheme, President Sarkozy is expected to announce next month that men and women will have to work after 60.

Portugal

Two weeks ago, the socialist government of Jose Socrates announced its second round of austerity measures in as many months – a mix of tax hikes and €1bn in spending cuts that it hopes will cut the 2010 deficit to 7.3%.

● VAT will be increased by a percentage point.

● Crisis one-off taxes on individual pay packets and corporate profits will be imposed.

● Top earners in the public sector will take 5% pay cut.

● Big projects such as a new international airport for Lisbon and high-speed rail lines are likely to be postponed.

Greece

Prime minister George Papandreou has crafted five austerity packages in as many months. The latest (at the beginning of May) paved the way for a bailout from the EU/IMF, but sparked mass demonstrations.

● Public sector pay has been frozen until 2014.

● Main VAT rate has increased to 23% from 19%.

● Retirement age expected to rise, and retiring under 60 will eventually be banned.

● Excise duty on fuel, cigarettes and alcohol rise by extra 10%.

Spain

Prime minister Jose Luis Rodriguez earlier this month announced another €15bn of savings and cuts to try and bring the Spanish deficit in at 9.3% this year.

● Ministers will take a 15% pay cut, while civil servants will have 5% docked.

● Regional and local governments will be expected to deliver €1.2bn in savings. There will be no pension increase in 2011.

● The €2,500 baby bonus given to mothers will be axed in 2011.

Italy

Silvio Berlusconi's cabinet last night signed off on a budget including €13bn in cuts for 2011 to bring deficit down to 3.9%.

● There will be a freeze on public-sector hiring and pay rises.

● Politicians and senior civil servants will take pay cuts – to the tune of €5bn.

● There will be a crackdown on tax invasion, illegal building and fraudulent benefit claims which government hopes will bring in €1bn.

● Those nearing retirement age will be blocked from taking their pension for a few months.

Germany

Government is to meet in a fortnight's time to discuss a major austerity programme expected to amount to cuts of at least €10bn a year from next year until 2016.

● The axe is expected to fall mainly on state subsidies.

● Tax cuts that Chancellor Angela Merkel's coalition partners had previously insisted upon are also likely to be shelved.

● There are also hints that the government will cut unemployment and social benefits, although Merkel has personally intervened to reject calls for cuts in education, research and social services.

Britain

Last week, David Cameron's government announced plans to cut £6.2bn (€7.3m) from government spending.

● The axe will fall most viciously on the Department for Business, Innovation and Skills which must find savings of £836m (€983m).

● Ministers will ditch their personal drivers and use public transport to help cut £1.2bn (€1.4m) from discretionary areas.

● Immediate recruitment freeze across the civil service until end of 2011.

● Higher education spending to be cut by £200m.



Report by John Lichfield - Tribune Buisness.

Popular posts from this blog

Ireland's Celtic Tiger Excesses...

'Bang twins' may never get to run a business again... POST-boom Ireland is awash with cautionary tales of Celtic Tiger excesses, as a rattle around the carcasses of fallen property developers and entrepreneurs will show. Few can compete with the so-called Bang twins for youth, glamour and tasteful extravagance. Simon and Christian Stokes, the 35-year-old identical twins behind Bang Cafe and exclusive private members club, Residence, saw their entire business go bust with debts of €9m, €3m of which is owed to the tax man. The debt may be in the ha'penny place compared with the eye-watering billions owed by some of their former customers. But their fall has been arguably steeper and more damning than some of the country's richest tycoons. Last week, further humiliation was heaped on them with revelations that even as their businesses were going under, the twins spent €146,000 of company money in 18 months on designer shopping sprees, five star holidays and sumptu

Property Tycoon's Dolce Vita Ends...

Tycoon's dolce vita ends as art seized... THE Dublin city sheriff has seized an art collection and other valuables from the Ailesbury Road home of fallen property developer Bernard McNamara. The collection will be sold to help pay his debts. The sheriff, Brendan Walsh, is believed to have moved against the property developer within the past fortnight, calling to his salubrious Dublin 4 home acting on a court order to seize anything of value from his home to reimburse his creditors. The sheriff is believed to have taken paintings from the family home along with a small number of other items. The development marks a new low for Mr McNamara, once one of Ireland's richest men but who now owes €1.5bn . The property developer and former county councillor from Clare turned the building firm founded by his father Michael into one of the biggest in Ireland. He is the highest-profile former tycoon to date to be targeted by bailiffs, signalling just how far some of Ireland's billionai

I fear a very different kind of property crash

While 80% of people over 40 own their own home just a third of adults under 40 do. This is disastrous for social solidarity and cohesion Changing this system of policymaking requires a government to act in a way that may be uncomfortable for some. Governments have a horizon of no more than five years, and the housing issue requires long-term planning. The Department of Public Expenditure and Reform was intended to tackle some of these problems. According to its website its remit is to “drive the delivery of better public services, living standards and infrastructure for the people of Ireland by enhancing governance, building capacity and delivering effectively”. So how is the challenge of delivering homes for people in 2024 and beyond going to be met? The extent of the problem is visible in the move by companies, including Ryanair, to buy properties to house staff. Ryanair has, justifiably, defended its right to do so. IPAV has long articulated its views on how to improve supply an