Introduction
In recent postings, I have documented the serious debt and other economic problems facing Greece, Ireland, Portugal, Spain, and the UK. I pointed out that the first four are at the mercy of the Eurozone partners and the IMF, and the resolution will require higher unemployment in these countries. The UK is also in a mess, but at least it can control its own destiny inasmuch as it has its own currency.
The problems facing these five countries has caused near panic in the stock markets of the world, causing high volatility and significant sell-offs. The question really should be: admitting the immediate future of these 5 countries is bleak, how will their problems impact the global economy?
Growth Prospects
The following table provides the latest growth estimates of the International Monetary Fund.
Table 1. – IMF GDP Growth Projections
| Region, Country | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| World | 5.2% | 3.0% | -0.6% | 4.2% | 4.3% | 4.5% |
| Advanced economies | 2.8% | 0.5% | -3.2% | 2.3% | 2.4% | 2.4% |
| Euro area | 2.8% | 0.6% | -4.1% | 1.0% | 1.5% | 1.8% |
| United Kingdom | 2.6% | 0.5% | -4.9% | 1.3% | 2.5% | 2.9% |
| United States | 2.1% | 0.4% | -2.4% | 3.1% | 2.6% | 2.4% |
| Emerging economies | 8.3% | 6.1% | 2.4% | 6.3% | 6.5% | 6.6% |
| Developing Asia | 10.6% | 7.9% | 6.6% | 8.7% | 8.7% | 8.6% |
| Middle East and North Africa | 5.6% | 5.1% | 2.4% | 4.5% | 4.8% | 4.8% |
| Sub-Saharan Africa | 6.9% | 5.5% | 2.1% | 4.7% | 5.9% | 5.5% |
| Western Hemisphere | 5.8% | 4.3% | -1.8% | 4.0% | 4.0% | 4.3% |
2009 was admittedly tough for most countries. But from this year moving forward represents a very different story. Even with the problems of the Euro area, advanced economies will grow by more than 2% in 2010. Emerging countries, on the other hand will grow at robust 6%.
Back to the problem countries of the Euro Zone. What is the worst that could happen? Table 2 gives the IMF estimated growth rates of Greece, Ireland, Portugal and Spain for 2010.
Table 2. – GDP Growth Rates of the European “Weak Sisters”
| Country | 2008 | 2009 | 2010 | 2011 | 2012 |
| Greece | 2.0% | -2.0% | -2.0% | -1.1% | 0.2% |
| Ireland | -3.0% | -7.1% | -1.5% | 1.9% | 2.3% |
| Portugal | 0.0% | -2.7% | 0.3% | 0.7% | 0.8% |
| Spain | 0.9% | -3.6% | -0.4% | 0.9% | 1.5% |
The second column of Table 3 gives the resulting GDP losses for each country. Now suppose that as a result of the “belt tightening” required by the IMF and other Euro Zone members, growth is slowed even further in 2010 such that the GDP losses are doubled. The results are given in the third column of Table 3.
Table 3. – GDP Losses of the European “Weak Sisters”
(in bil. US $)
| GDP Change | ||
| 2009 to | 2009 to | |
| 2010 | 2010 | |
| Country | Projection | Doubled |
| Greece | -5.7 | -11.4 |
| Ireland | -11.7 | -23.3 |
| Portugal | -1.9 | -3.8 |
| Spain | -39.4 | -78.7 |
| Total | -58.6 | -117.2 |
Global GDP in 2010 is projected at $61,766 billion. A further loss of $58.6 billion will reduce global GDP by one-tenth of one percent. Who cares outside of the people who will lose their jobs? It is irrelevant to global growth prospects.
What if the governments of weak sisters default on all their debt? In an earlier article, I estimated government debts as a percent of GDP. Table 4 provides the dollar figures on this debt.
Table 4. – Government Debt of the European “Weak Sisters”
Country |
Debt |
| Greece | 367 |
| Ireland | 138 |
| Portugal | 169 |
| Spain | 712 |
| Total | 1,387 |
So what if these 4 countries default on all of their debt? They won’t, but if they did, some poor banker, sovereign fund, hedge fund, or whatever will lose US$1.3 trillion. And we are supposed to be worried? Let us put this in context: The Western banking collapse resulted in a stock market loss of $36 trillion!
Thinking rationally, this European problem is nothing and should be contained by the European/IMF support fund of almost US$1 trillion. But there is worry in the markets, so who knows where it will all lead.