First it was Greece and now Ireland. Who’s next? On Sunday the European Union (EU) agreed to give $89.4 billion in bailout loans to Ireland to help it weather the storm created by its massive banking crisis. Two of the 16 euro-zone nations have now sought financial support from the EU and the International Monetary Fund (IMF). Portugal and Spain are rumored to be next on the list of countries needing financial assistance. Germany has reluctantly supported the bailouts so far. The question is: Will they continue to offer their support if Portugal and Spain need a bailout too?
Germany is in a decent fiscal position today compared to the rest of the euro-zone with a Debt to GDP ratio of about 63%. Reference www.visualeconomics.com/gdp-vs-national-debt-by-country/ Germany has been proactive with their fiscal responsibility. They have a very hardworking culture and several years ago increased their “normal” retirement age from 65 to 67 to compensate for a rapidly ageing population that is living longer. However, in neighboring France a recent plan to raise the official retirement age from 60 to 62 provoked massive protests and outcry. Could the European Union shrink from 16 nations to something smaller so that Germany doesn’t have to continue supporting the bailouts of weaker countries like Greece and Ireland? At what point does the market start to demand higher interest rates on Germany’s debt because of the sins of their neighbors?
Certainly additional fiscal tightening is needed across the region. Tax increases are also likely to occur. Fiscal austerity is a must but does it threaten the structure of the EU or push the euro-zone back into Recession? Expect the financial problems of Europe to play out over a number of years and keep an eye on Germany as the key opinion in terms of both future bailouts and any eventual changes in the makeup of the European Union.
