Time-Bombs Ready to Explode

This summer, while some people will be sunning themselves on far-off beaches somewhere in secluded spots, maybe it’s time to think about the fact that there are three time-bombs ticking away today ready to explode in the face of the world. It’s not all sunny-skies ahead and no intent to portend doom and gloom, it’s staring us all right in our faces. The EU is part of the problem and it hasn’t admitted that or even recognized it yet. The EU has been going hog wild over the past few years but now it seems like it’s time to pay the bill.

The EU is the only place on earth where economic growth is still at a standstill today according to a statement made by Christine Lagarde, the Managing Director of the International Monetary Fund.

There are currently three time-bombs that are ticking away just waiting to explode and everything points to the fact that if they do go off, they might all just happen at the same time and cause even more chaos for the EU, with a knock-on effect around the world.

Time-Bomb No. 1

EU: Time-Bomb 1

EU: Time-Bomb 1

The devastating effects of the austerity measures implemented throughout the EU meant putting into effect budgetary cuts at the worst time possible for member states. The economies of the EU member states were far from out of the recession. The only effect that has been brought about is a further collapse in those economies, resulting in increasing unemployment and further debt due to lack of economic growth. The EU promised to provide €6 billion in order to come to grips with youth unemployment in particular which is hitting record levels only recently. The past three years of austerity and nothing but have meant that unemployment has soared beyond belief. The priority will be those areas where youth unemployment is over 25%. But, this will have little effect according to analysts in countries like Spain and Greece where unemployment for 15-24 year olds has gone over 50%. Greece stands at 59.2% and Spain has a rate just under that at 56.5% for this age group.

If the troika of the European Union, the European Central Bank and the International Monetary Fund are now probably realizing that their policy of budget cuts and austerity are in fact holding the EU back from making any form of progress, the bomb is still ticking away. An extra $8.7 billion has just been allocated to try to get Greece out of its sticky mess. But, that won’t change anything today. They are too far down the dirt-gravel track leading to implosion ready to tip them over the edge of the cliff. All of this will certainly lead to implosion relatively quickly as citizens (who were largely prepared in the beginning to make the effort and go the extra mile with austerity) start realizing that the measures have had no effect on reducing public debts. That will mean widespread social unrest and demonstrations. In the EU27, the government debt-to-GDP ratio rose from 82.5% (2011) to 85.3% (2012). For the Eurozone this was even greater (97.3% to 90.6% over the same period).

Unless the powers-that-be agree to write off those debts and forego them, the bomb will explode. But, probably, even if they write the debts off, there will be a future explosion at some point as all countries decide to default on their payments. Whichever way we look at it, there doesn’t seem as if there is a way out.

Time-Bomb No. 2

EU: Time-Bomb 2

EU: Time-Bomb 2

European banks have 1, 700 billion government securities on their books at the moment. They were convinced that they should buy those securities since the state would always be there to back them up in case they went under. But, now since Ben Bernanke at the Federal Reserve has stated that the US economy will slowly be weaned off Quantitative Easing, US interest rates will more than likely increase (as the selling of Treasury Bonds showed immediately after the announcement on June 19th 2013). If interest rates rise, then the price of the bonds will fall, obviously. If the US withdraws that injection of money in the economy, rates will rise in the US and the EU will have to follow suit. That would have catastrophic consequences on European banks which have been feeding like gannets on government securities for the past few years. The European Central Bank would have to step in to save them yet again. Boom!

Time-Bomb No. 3

EU: Time-Bomb 3

EU: Time-Bomb 3

China will have a knock-on effect around the world and in particular in the EU. This will be the third detonation. In the wake of shadow-banking scandals and reduced liquidity of banks coupled with the slowing down in economic growth in China (despite the fact that forecasts show it will be around the 7.7% mark next year). Such a slow-down in a mature economy would be tantamount to a recession in China and that should also be worrying. This might be worsened still if the interest rates are maintained high in the USA, as it would result in a flight of capital from emerging countries, slowing down their economic growth even more and then spiral through. If the emerging countries slow down, then the EU will take the brunt of the impact after the previous two bombs.

Clearly, there are few in the EU that actually believe that austerity has already and will continue to damage economic-growth prospects there. The time-bombs are ticking and it certainly looks like they will go off at some time in the very near future. So, come on EU stop being a stick-in-the-mid and get your finger out. Austerity hasn’t reduced the debt of the EU and it won’t. It’s made it worse. If all else fails, they could always semtex themselves and do a good job, couldn't they?

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tothetick

Professional team of writers/analysts analyzing the financial markets.

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