Europe danger continues; Asia as the buffer

Wednesday 15th May 2013

While the New Zealand economy keeps warm under a safety blanket called the Asian growth, the dangers of Europe should not be forgotten.

Murray Brewer, partner, Grant Thornton New Zealand, said that the latest Grant Thornton International Business Report, The Future of Europe, continued to underline the problems of the Eurozone.

“Just because we have not heard too much from the Eurozone in recent months, it doesn’t mean to say that the problems have disappeared. Maybe our tolerance of their problems has increased, but they still remain dangerous as far as the how the world economy is going.

“For New Zealand businesses, while it is fortunate we continue to diversify our foreign export markets and continue our growth into the likes of China, businesses must be wary that further destablisation of the European economy may cause monetary ripples for New Zealand, which will drag us back from the fragile recovery we currently have.

“A word of caution is to not become too stretched gaining exposure in these growth markets as any financial earthquakes in any parts of the European economy will create aftershocks for the New Zealand economy,” he said.

The report highlights the fact that Greece and Ireland are both off the critical list but remain in intensive care, while Cyprus is on oxygen and Spain has cripplingly high youth unemployment rates and an overall unemployment rate of 27.6%. These are certainly not the foundations on which to grow a prosperous economy. Italy and France are not flash either.

“The concern for Europe is that their low growth rates are running tangentially to huge fiscal austerity programmes which are shrinking levels of government spending across the continent in a concerted effort to lower levels of sovereign debt. However, slow growth and elevated levels of unemployment are weighing down on tax receipts whilst pushing benefits payments up.

“Because the countries introducing the heaviest austerity programmes are starting from a relatively high level of debt and the negative impacts of the cuts they are making is large, rather than decline, debt to GDP ratios actually look set to rise for some time,” he said.

The net government debt of Greece is expected to reach 181% of GDP this year, up from 165% in 2011 while the debts of Portugal (119%), Ireland (107%) and Italy (104%) are all expected to continue climbing over 100%. Spain’s debt is set to climb to 84% from 57% in 2011 while France and the United Kingdom have both lost their AAA credit ratings. By comparison, New Zealand recorded a Government Debt to GDP of 35.90% of the country's Gross Domestic Product in 2012.

“These figures show that Europe is not a ‘quick fix’ more a long term nursing back to health. Unfortunately, throughout this long convalescence, it could easily fall back to ill-health,” he said.

Amongst the highlights of the report were:

Europe’s economies are stagnating: economic and business growth prospects are weak, and unemployment rates are set to remain high; rising business investment offers some hope.

Support inside the euro remains strong: 94% of eurozone business leaders want to see the euro survive and just 6% want their economy to exit; 78% view joining the single currency as positive, up from 71% in 2012.

Eurozone members are open to further integration: 66% want to see further economic integration, with 40% open to more political union; a further 65% show support for eurobonds, although this drops to just 32% in Germany.

Less appetite for a ‘Grexit’: the proportion of eurozone members wanting to see economies leave the euro has fallen from 24% in 2012 to 17% this year.

Potential entrants remain keen to join: more than 50% of business leaders in Denmark, Latvia, Lithuania, Poland want to join the euro; although majorities in Denmark and Poland do not see it happening until 2018 at the earliest.

Eurosceptic nations wary of further EU integration: more than half of businesses in Sweden and the UK do not want to see any further integration and one in ten think the euro should break up.

Neighbouring markets see declining value in improving ties: 52% of EU neighbouring economies believe further integration would be an advantage, down from 62% in 2012; increased opportunity for exports is seen as the key benefit; one in five would like their economy to eventually join the euro.

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