After 'Bleak Forecasts' for the Eurozone's Three Weakest Countries, European Commission Warns That More Fiscal Austerity Is Needed, But Germany's Economy Is Strong

What Does Fiscal Austerity Mean?

Wikipedia - In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt. Austerity was named the word of the year by Merriam-Webster in 2010.

Austerity measures are typically taken if there is a perceived threat that government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies which they have no right to issue or they have been legally forbidden from issuing their own currency.

In such a situation, banks may lose trust in government's ability and/or willingness to pay and refuse to roll over existing debts or demand exorbitant interest rates. Inter-governmental institutions such as the International Monetary Fund (IMF) typically come in and demand austerity measures in exchange for functioning as a lender of last resort.

When the IMF requires such a policy, the terms are known as 'IMF conditionalities'. Development projects, welfare, and other social spending are common programs that are targeted for cuts. Taxes, port and airport fees, and train and bus fares are common sources of increased user fees.

In many cases, austerity measures have been associated with short-term declines in standard of living until economic conditions improved and fiscal balance was achieved.

OECD Economic Outlook Database (version 88) from Timetric

EU Warns Debt in Bailout Countries Above Forecasts

May 13, 2011

AP - The European Union warned Friday that the debt loads of Greece, Ireland and Portugal will be much bigger than previously forecast, adding to fears that international bailouts are failing to solve the region's crisis.

The EU's Monetary Affairs Commissioner Olli Rehn said Greece needed to cut spending even further than foreseen in its bailout program. While he fell short of confirming the country may soon need a second bailout — on top of the €110 billion ($156 billion) in rescue loans it got a year ago — Rehn said its situation was "very serious" and called on opposition forces to support the government's efforts.

The bloc's biannual economic forecasts did paint a more optimistic picture of the economy of Spain — commonly seen as the next-weakest state in the eurozone — which supports the currency union's hope that the debt crisis won't draw in any other countries.

However, for the three countries that have already received or are about to get international help, debt is expected to remain a problem for some time. The higher debt forecasts, combined with larger budget deficits and weak growth, boost the complaints of many economist that the bailouts are taking too hard a toll on economic activity and are not solving the debt problem.

Greece's debt will reach 157.7 percent of economic output this year and jump to 166.1 percent in 2012, the European Commission, the EU's executive, said in its forecast. That's up from 150.2 percent and 156 percent respectively it predicted last fall.

Although Greece on Friday reported economic growth of 0.8 percent in the first quarter, that was little more than a rebound from a sharper than expected drop the previous quarter. Its longer-term prospects remain grim, with the Commission forecasting a 3.5 percent drop in economic output this year.

While expected, the Commission's sharp debt revisions will likely spice up discussions among eurozone governments on whether Greece will need a second bailout. It will also fuel calls from many economists who say the country needs to restructure its debts — forcing private creditors like banks and investment funds to accept later or lower repayments on the bonds they hold.

Greece's budget deficit will likely be 9.5 percent this year, about 2 percentage points above previous forecasts and the targets set out in its bailout program. The shortfall is expected to remain high at 9.3 percent in 2012.

"There is a need to take additional measures of fiscal adjustment already this year," Rehn said, though he declined to give details on whether — and in what form — there many also be additional support from other eurozone countries and the International Monetary Funds.

"I stick to the verbal discipline we agreed in the Eurogroup," Rehn said, referring to the grouping of eurozone finance ministers.

He added that he expected serious discussions on further measures for Greece to begin at the ministers' next meeting on Monday.

Greek Prime Minister George Papandreou rejected charges from a European Central Bank official that his country wasn't implementing the reforms promised to its international creditors.

"We believe we are on track," Papandreou said on a visit to Oslo, again hitting out at investors who he said were making speculative bets against Greece.

The situation does not look much better in Ireland, the second country to get bailed out last year. It debt is expected to hit 112 percent of gross domestic product this year before rising to 117.9 percent in 2012. That's up from earlier forecasts of 107 percent and 114.3 percent.

Its economy is predicted to grow a meager 0.6 percent this year, while it will likely run a deficit of 10.5 percent, up from 10.3 percent forecast in the fall.

The most severe revisions were made for Portugal, which at the time of the last forecast was still hoping to avoid a bailout. However, after last year's deficit turned out much bigger than expected and the government collapse over austerity measures, Lisbon asked for help last month. Finance ministers are expected to sign off on a €78 billion ($110 billion) rescue package for the country on Monday.

Portugal's debt will likely stand at 101.7 percent of GDP in 2011 and increase to 107.4 percent next year, the Commission said. That's up from 88.8 percent and 92.4 percent previously.

The Portuguese economy will likely contract 4 percent over the next two year, in line with what international exports examining the country's books to prepare the bailout predicted last week. The deficits projections are also based on the targets set out in Portugal's bailout program, 5.9 percent this year and 4.5 percent in 2012.

The bleak forecasts for the eurozone's three weakest countries contrast with strong economic growth in the currency union's large countries such as Germany and France, where GDP growth was revised up.

Even for Spain there was some good news in Friday's forecasts.

Its debt load will reach 68.1 percent this year and grow to 71 percent in 2012. That's better than the 69.7 percents and 73 percent predicted last fall.

Germany Powers Eurozone Economic Surge

May 13, 2011

AP - Forecast-busting economic growth in Germany and a surprise rebound in Greece helped the eurozone start the new year far better than anticipated, even though Portugal sank back into recession.

Eurostat, the EU's statistics office, said Friday that the economy of the 17 countries that use the euro grew by a quarterly rate of 0.8 percent in the first three months of the year. That was more than double the 0.3 percent growth posted in the previous three-month period and ahead of analysts' expectations for a 0.6 percent increase.

In year-on-year terms, the eurozone economy grew 2.5 percent, more or less in line with what many say should be the eurozone's long-term average.

"The eurozone is therefore significantly outperforming all other major developed economies at the moment," said Chris Williamson, chief economist at Markit.

By comparison, Eurostat said the U.S. grew by a 0.4 percent quarterly rate in the first three months of the year — the U.S. uses annualized figures to collate its growth statistics.

Unsurprisingly, given its sheer size, Germany was the main reason the eurozone grew by more than expected. Its 1.5 percent growth during the quarter means the EU's largest economy has now made up all the output lost during the recession. The growth was driven by a healthy balance of exports and household spending.

"Germany is the engine of growth among industrial countries — and not just in Europe," Economy Minister Philipp Roesler said.

France, the eurozone's second-biggest economy, grew by a robust 1 percent on higher consumer spending and business investment. Northern economies like the Netherlands grew strongly, while Italy and Spain lagged behind.

Perhaps more surprisingly, given the debt quagmire it is in, Greece posted solid growth of 0.8 percent, its first economic expansion since the fourth quarter of 2009. However, the increase is unlikely a sign of a sustained rebound. The growth was artificially inflated by the fact that the previous quarter's contraction was doubled to a colossal 2.8 percent.

Manos Chatzidakis, head of investment strategy at Pegasus Securities, said the Greek figures were disappointing because of the revision and warned that much remained to be done before the economy could recover.

"The economy still has a considerable way to go before recovery," said Chatzidakis. "We remain in a very unfavorable situation."

Portugal, another bailout recipient, returned to recession. Its 0.7 percent quarterly decline follows the 0.6 percent drop recorded in the previous three-month period — a recession is classified as two consecutive quarters of negative growth. Portugal is the third eurozone country to agree to a bailout, following Greece and Ireland.

Separately, the European Commission, the EU's executive, said it expects the eurozone economy to grow 1.6 percent in 2011 following a 1.8 percent rebound in 2010. Germany is expected to grow 2.6 percent this year but Greece is anticipated to shrink another 3.5 percent this year following last year's 4.5 percent contraction.

"The main message in our forecast is that the economic recovery in Europe is solid and continues, despite recent external turbulence and tensions in the sovereign debt market," said Olli Rehn, the European Commissioner for Economic and Monetary Affairs.

The figures helped the euro, which had lost about 8 cents to the dollar this week as investors scaled back expectations of interest rate increases by the European Central Bank and worried about Greece's debt troubles.

By late morning London time, the euro was 0.4 percent higher at $1.4293, having traded as far as $1.4338 earlier. Last week, it was near 18-months high above $1.49.

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