(Carmel Crimmins and Gavin Jones) - Europe's "no pain no gain" attitude to solving its sovereign crisis risks exacerbating the bloc's problems, choking off the very growth needed to raise the money to pay down the debt.
From Athens to Dublin, and almost everywhere in between, administrations are imposing wave after wave of spending cuts and tax increases to persuade investors they are serious about improving their public finances and persuade them to start buying euro zone sovereign debt again.
The austerity zeal risks tipping the continent back into recession and a downward spiral of austerity as pitiful growth prospects undermine budgetary targets and ramp up debt burdens, meaning further austerity is required.
"The expansionary fiscal contraction story says that you cut, you show you are serious about cutting and then the confidence fairy will come along and she will start pulling in private investment," said Stephen Kinsella, professor of economics at the University of Limerick.
"The expansionary fiscal contraction story is a lie. You don't cut your way to growth."
With the crisis spreading like wildfire through the currency bloc's core, pushing up borrowing costs to unsustainable levels, countries are relying more on blunt budget cuts, than time-consuming and difficult structural reforms, to get results.
The upshot is ballooning dole queues, shuttered businesses and public services stretched to breaking point.
On the streets of Athens and Dublin poverty has visibly increased with more and more homeless people huddling in doorways. In Spain, emergency wards have been shut and in Italy, retailers are struggling to get by.
"Consumption has been falling pretty steadily since the winter of 2008. Normally in a crisis, it starts with menswear and goes to womenswear and children. This time, it's hit them all at once," said Attilio Lebole, head of Textura, a mid-range clothing wholesaler based in Florence.
"Demand is falling, there's no doubt about that. Only foreigners are still shopping."
Despite having an estimated budget deficit this year of 3.8 percent of GDP, below the European average of four percent, Italy has been piling on austerity since the summer, destroying its already poor growth prospects and then responding with still more austerity to make up for the weaker growth.
Italy's dismal growth prospects and an inability to pass growth-enhancing reforms have been the key reasons given by ratings agencies for downgrading the country, not deficit slippage.
"Italy is paying a very high price for lending credibility to Germany's push for greater fiscal discipline across the eurozone," said Nicholas Spiro, head of Spiro Sovereign Strategy.
TERRIFIED OF SPENDING
In the pre-euro days, currency devaluation was the quick-fire route to getting overblown economies back on track. What's needed now is "internal devaluation" to get wages and domestic prices down. But if everyone is cutting back where will the demand come from?
Global growth was meant to be the secret ingredient that kept the Irish economy ticking over while it slashed household income -- down by an estimated 16 percent so far and counting -- but the spread of austerity measures across the euro zone has shrunk its growth prospects and forced Dublin to cut even harder.
Held up as a role model for other indebted nations, the irony is that Ireland's recovery story looks set to be tripped up as others follow suit.
In Spain, the incoming government is hoping that changes to a labor laws, which would untie wages from inflation, as well as measures to aid new businesses would help spur growth despite painful cutbacks.
But analysts are unconvinced and say inevitable austerity measures needed to make tough public deficit targets in 2012 will serve to trim growth even further.
A Reuters poll on November 24 showed the economy not growing at all in 2012. Others like savings bank foundation FUNCAS predict the economy will contract 0.5 percent next year as a result of the impending austerity measures.
"The deficit objectives are so tough that in the short-term it's not going to allow the government room to stimulate the economy or create jobs. There is no fiscal margin to do so," said Angel Laborda, head of research at FUNCAS.
Across the euro zone, retailers are bracing themselves for yet another drop in Christmas cheer as sales taxes are hiked in Italy, Greece and Ireland.
The Greek Commerce Confederation (ESEE) is predicting a 22 to 30 percent fall in retail sales, with per capita spending seen dropping to 288 euros from 410 last year and 550 euros in 2009.
And the New Year isn't looking much better. Last week's European summit laid out plans for balanced budgets implying austerity budgets for years ahead for many European states.
Hilary Behan has already closed three of her six children's clothes stores in Ireland, cut her staff from 38 to 20 and asked her store managers to take pay cuts of between 10 and 15 percent. Sales are down by over a third since 2008.
"It just keeps getting worse and that's the worrying thing there is no sign of any recovery. Every time the government get a chance they remove any chance of there being any sort of a recovery," she said.
"It's not even the amount of money that they are taking from people it's the constant battering. People are terrified to spend."
(Additional reporting by Giulio Piovaccari in Rome, George Georgiopoulos in Athens and Nigel Davies in Madrid. Editing by Jeremy Gaunt.)
Copyright 2011 Thomson Reuters. Click for Restrictions.
19/12/2011 17:25 GMT
<strong>Spain's Incoming Prime Minister Offers Details On Economic Reform</strong>
Mariano Rajoy, who will be sworn in as prime minister of Spain on Wednesday, has lain out some of the measures his government intends to take to address Spain's looming budget deficit.
Rajoy told members of Parliament Monday that his government will pass a provisional 2012 budget by the end of December, according to the Financial Times.
Under Rajoy's plan, public sector hiring is expected to drop off sharply, and all forms of public spending except pensions will be vulnerable to cuts, the FT reports. The proposed budget aims to reduce Spain's deficit by €16.5 billion, according to BBC News.
Spain has an unemployment rate of nearly 23 percent, the highest of any developed economy. Rajoy told Parliament that measures to reform the labor market would be devised by the end of March.
14/12/2011 22:12 GMT
Fitch Downgrades Five Major European Banks
The credit ratings agency Fitch Ratings just downgraded five major European banks and banking groups: Credit Agricole in France, Rabobank Group in the Netherlands, Danske Bank in Denmark, OP Pohjola Group in Finland, and Banque Federative du Credit Mutuel in France.
From the press release:
The downgrades reflect the broader phenomenon of stronger headwinds facing the banking industry as a whole. Exposure to troubled Eurozone countries through their subsidiaries was a direct consideration in the downgrades of Danske Bank and Credit Agricole. For the other banks, however, Fitch considers the Eurozone crisis is also having negative indirect consequences. Capital markets, in particular interbank markets, are not functioning effectively, and, along with more global factors, the crisis is driving economic slowdown.
14/12/2011 21:18 GMT
Protesters Ramp Up Across Europe
Fast-growing populist parties across Europe are ramping up their protests against ruling governments in response to last week's European summit deal to implement stricter rules to prevent European countries from spending more than allowed, according to The Financial Times.
From The Financial Times:
The trend made its most high-profile intrusion yet in Italy on Wednesday, when senators from the anti-EU Northern League heckled and jeered Mario Monti, the technocratic prime minister, as he was presenting his austerity programme.
The Northern League outburst came as populist leaders in Finland, Hungary and the Netherlands have also renewed attacks on government leaders. Several denounced a proposed intergovernmental treaty agreed at the summit on Friday, which would strictly limit spending in signatory countries.
14/12/2011 21:09 GMT
Germany Paves Way For A Bank Bailout
German Chancellor Angela Merkel's cabinet agreed on Wednesday to reinstate Germany's state bailout fund, paving the way for Commerzbank, Germany's second largest bank, to receive a government rescue, according to The Financial Times.
From The Financial Times:
Officials in Berlin are privately sceptical that Commerzbank can keep to its pledge to shore up its capital without using more state funds. The bank received more than €18bn of aid during the financial crisis and remains 25 per cent state-owned.
Commerzbank was one of the biggest losers when the European Banking Authority this month published updated results of stress tests of European banks along with orders to plug any capital needs. Commerzbank, which owns €13bn of the peripheral eurozone debt at the heart of the continent’s fiscal crisis, saw its capital gap balloon from €2.9bn to €5.3bn because of the debt exposure.
14/12/2011 18:52 GMT
Major French Bank Announces 2,350 Job Cuts
Credit Agricole, France's third largest bank, announced on Wednesday that it would slash 2,350 jobs and not give stockholders a 2011 dividend, according to The Financial Times.
The bank also plans to deleverage its activities, cut bank its consumer finance unit, and desert operations in 21 countries, according to the FT.
European banks provide substantial financing to emerging economies in Latin America and Asia, according to some economists, so the retrenching of European banks is likely to be a double-whammy for the American economy: both by tightening credit in the United States and by hurting demand for American exports as businesses in emerging economies have trouble finding financing.
14/12/2011 17:37 GMT
European Stocks, Italian Bonds And The Euro Get Hammered
European markets have taken something of a battering today, with all the major indices posting substantial losses. The euro fell to an 11-month low and Italy saw its 5-year bond yields rise to a euro-era high at an auction in the morning.
At the root of much of the turnaround in sentiment is renewed opposition to the use of the European Central Bank's "bazooka" to buy up European debt, or to inject money into the International Monetary Fund (IMF) for the same purpose.
The German DAX and French CAC-40 fell 1.6% and 3%, respectively, while the FTSE-100 was down more than 2% on a combination of domestic and European economic worries.
14/12/2011 17:27 GMT
Merkel Says UK 'Still An Important Partner' For EU
Angela Merkel has said that she regrets that the UK is not involved in the newly negotiated treaty within the EU, but has reiterated that Britain remains an important partner to the EU and to Germany.
Speaking in the Bundestag, the German chancellor said it was regrettable that Britain was not part of the process, agreed in frantic talks last week, that pledged to create enforceable fiscal rules within the eurozone and to move towards greater economic integration.
But she added: "I have no doubt that in the future Britain will also be an important partner in the European Union.
"Britain is not only an important partner in foreign and security affairs. Britain is a partner in many other areas - in competitiveness, in the internal market, in trade, in [fighting] climate change."
The UK is the only country out of the 27 EU member states that is not part of a plan to better integrate the union's economies. Prime Minister David Cameron's decision to pull out of talks led to fears that Britain could become isolated from the EU, its largest trading partner.
14/12/2011 17:16 GMT
German Economy To Stagnate In 2012: Report
Germany, Europe's largest economy, will not be immune from the economic downturn plaguing Europe. The University of Munich's Ifo Institute forecasts that the German economy will grow just 0.4 percent next year -- much less than the 2.3 percent growth originally forecast in June, according to Dow Jones Newswires.
"The debt crisis is slowing down the German economy," the Ifo Institute said in the report.
14/12/2011 16:47 GMT
German Coalition Party In Disarray
The leader of Germany's liberal Free Democratic party unexpectedly resigned on Wednesday, highlighting the disorganization of the party, a junior partner in Angela Merkel's ruling coalition, as it struggles to define its eurozone policies, according to The Financial Times.
Christian Lindner, the party's chief manager, resigned without giving a clear explanation.
From The Financial Times:
The resignation confirms the perception of the FDP as a party without clear leadership or direction, undermining the coherence of the Merkel government and making all forms of decision-making in the coalition more complicated.
14/12/2011 16:19 GMT
ECB Needs To Guarantee Maturing European Debt: John Paulson
The European Central Bank needs to guarantee the maturing government debt of countries such as Italy and Spain so that their borrowing costs can fall back to a sustainable rate of about 4 percent, hedge fund manager John Paulson wrote in an op-ed in The Financial Times on Wednesday. Paulson is known for earning more than $15 billion for his firm by betting heavily against the housing market before the housing bubble burst.
In return, the ECB could collect a one percent annual guarantee fee, and it most likely never would have to act on the guarantee, so it would not cause inflation, Paulson wrote.
From the op-ed:
The benefits to this programme are many: it would immediately stabilise the sovereign credit market, it would not expand the ECB’s balance sheet, it would not cause inflation, it would keep interest costs low, and negate the need for the ECB to buy debt in the primary or secondary market. Since Italy and Spain are facing liquidity, not solvency issues, the guarantee would probably never be used, and the ECB would collect fees for its service.