1. 05 May 2012
Europe’s focus is shifting from austerity to growth
Spanish 10 year Bond Yields (May 2011-Apr 2012) EU GDP Growth and Deficit (2005-14)
7.0%
4%
GDP (% change)
Deficit (% GDP)
6.5%
2%
6.0% 0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
5.5% -2%
5.0% -4%
4.5% -6%
May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12
Source: Banco Español and QNB Group analysis Source: IMF April 2012 World Economic Outlook, QNB Group analysis
Europe’s fiscal austerity policies are the key issue deficit reduction has diminished. Therefore, the
in elections taking place today (May 6th) in France political debate has shifted increasingly to the pain
and Greece. They are happening in the context of a caused by the austerity policies and structural reforms.
growing backlash across Europe against efforts to Critics of austerity say that it is preventing
slash deficits, according to QNB Group analysis. Europe’s economy from recovering from recession,
Austerity policies—reducing government and could thereby undermine the deficit reduction
spending and raising taxes—were developed in goals themselves. Amongst these critics is Joseph
response to Europe’s sovereign debt crisis and Stiglitz, a former World Bank Chief Economist, who
enshrined in a fiscal compact signed by 25 EU states warned recently that the European policies are
(all except the UK and Czech Republic), which is dangerous because there is no precedent for a
awaiting ratification. The compact requires countries successful austerity programs in any large country.
to implement legally-binding balanced budget laws, or On the same day, Standard & Poors cut its
face fines, and to reduce their public debt levels to sovereign rating for Spain by two notches to BBB+,
60% of GDP over 20 years. following a downwards revision in its forecast for
Following agreement on the compact, the Spanish GDP this year, from mild growth to a 1.5%
Eurozone received a boost over the recent months contraction. It warned that fiscal austerity would
when the European Central Bank provided around exacerbate the risks to Spanish growth over the
US$1trn in two allotments of three-year financing to medium term.
banks at 1% interest. This temporarily reduced Spain is facing particularly serious difficulties in
concerns about liquidity in the European banking reviving its economy, which has just slipped back into
sector and contributed to a fall in government bond recession and posed a deficit of 8.5% of GDP in 2011.
yields and a rally in equity markets. In addition, new data shows that its unemployment
However, a raft of bad economic data, including rate has reached a record 24.4%, and youth
poor first quarter GDP figures and rising unemployment is more than double that level. In this
unemployment numbers in some countries, has begun context, the yield on Spanish debt (and also Italian
to turn the sentiment sour. Moreover, as fears of debt) seems to be drifting back towards the 6% level
sovereign debt defaults and an imminent breakup in that is seen as being unsustainable.
the Eurozone have receded, the political impetus for
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2. In the last week of April, the governments in towards policies designed to stimulate growth in the
Romania and the Netherlands both collapsed in no- short-term.
confidence votes. This happened as members of the Mr Hollande’s proposal to revise the compact is
ruling coalitions defected in opposition to austerity not being received favourably by countries that
measures that are unpopular with the public. spearheaded the agreement. However the EU policy
All eyes are now on the elections today. Greece community appears to be open to implementing some
has undergone by far the most extreme austerity over of his growth suggestions through different channels.
the last few years. It has sought to reform a bloated Mario Draghi, the president of the European
public sector and meet deficit reduction targets, upon Central Bank, has spoken of the need for a separate
which bailout funding, needed to refinance its debt, growth compact and Herman Van Rompuy, the
has been conditional. The country has faced waves of president of the European Council, has floated the idea
strikes in opposition to these policies. of an emergency heads of government meeting to
Some opinion polls suggest that rising support for discuss growth strategies. This indicates a shift in
parties opposed to austerity may prevent a coalition of European thinking from austerity to more growth-
the two main parties from forming a parliamentary focused policies.
majority. These parties were formerly staunch In its recent World Economic Outlook, the IMF
opponents, but have now been forced into alliance for forecast that the EU economy will be flat in 2012, with
the sake of the country’s EU bailout, which requires 3.3% growth in Germany offset by contractions in
the implementation of austerity policies. Political countries such as Italy, Spain and Greece. Growth will
turmoil in Greece could undermine the bailout and remain well below pre-crisis levels in subsequent
revive fears about the country exiting the euro. years. Meanwhile, the IMF forecasts a fiscal deficit of
Meanwhile in France, Europe’s second largest 3.8% of GDP for the year—all countries will be in the
economy, polls suggest that the socialist candidate, red, ranging from 0.8% for Germany to 8.5% for
François Hollande, will unseat Nicolas Sarkozy as Ireland.
president. Mr Hollande has called for renegotiation of The coming weeks are likely to be turbulent
the European fiscal compact to add elements aimed at economically for Europe, whatever the outcomes of
promoting growth and job creation, such as jointly- the Greek and French elections. However, QNB Group
backed bonds to fund infrastructure projects. Although notes that there is a growing recognition that even if
he is not planning on completely reversing austerity, austerity is unavoidable, more efforts are needed to
his is spearheading the shift in European thinking soften its edges and promote growth. It will be a
difficult balancing act.
Tweets
 The economic focus in Europe is shifting to place more emphasis on growth, not just on austerity
measures
 This comes at a time when economic indicators for the Q1 have been disappointing, particularly in Spain
where unemployment hit 24.4%
 Popular anger at austerity has toppled the Dutch and Romanian governments and is shaping the Greek and
French elections
 Europe faces a difficult balancing act between austerity, which may be unavoidable, and measures to
stimulate growth
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