Bénédicte Kukla is an economist at Crédit Agricole SA. A specialist in the so-called peripheral countries of the Eurozone (Spain, Ireland, Greece, and Portugal), Bénédicte Kukla discusses with BSI-Economics the economic situation in these countries and the challenges ahead in order to emerge from the crisis.
The process of debt reduction (in both the public and private sectors) is now well underway in the peripheral countries. At this stage, has it generally benefited these economies or has it acted as a brake?
BK – Today in the Eurozone, we have only seen the devastating effects of fiscal austerity policies: falling consumption, capital flight, drastic reductions in public investment, etc. Moreover, despite significant efforts to reduce public and private sector debt, the debt reduction process is far from complete at this stage. The stock of debt, particularly in the countries on the periphery of the eurozone, remains very high and no country has yet succeeded in stabilizing its debt. That said, the weak recovery in activity, driven by exports, forecast for 2014 in most of the peripheral countries, should facilitate the deleveraging process. However, risks remain as we continue to face the problem of how to balance fiscal austerity in the eurozone. For example, Portugal’s 2014 budget announces further draconian fiscal measures, which could once again damage the already fragile recovery. In the longer term, the debt reduction process should enable these economies to start again on a healthier footing. Without debt reduction, these countries will have to devote 4-5 points of their GDP to covering interest payments, which is a significant loss of resources.
Should peripheral countries continue their devaluation efforts to become more competitive?
BK – Being in a monetary union, it is impossible for these countries to devalue their currencies to regain competitiveness. The solution therefore appears to be to devalue prices, particularly wages. But the situation is much more complex than that. Can we really ask a country like Portugal to reduce wages further when the minimum wage is around €600 per month? The issue of competitiveness is not just a question of wages. It also depends on the country’s industrial specialization, corporate taxation, and investment in innovation and infrastructure. These issues must be addressed as a whole in order to restore competitiveness in the long term.
On October 7, Greece presented its preliminary draft budget for 2014. Despite numerous efforts, praised by the IMF among others, the purge of public debt still seems to be problematic. Is a new round of negotiations between Greece and its creditors to ease the debt conceivable?
BK – With debt at 176% of GDP forecast for the end of 2013, Greece’s public debt seems difficult to sustain. Nevertheless, the current objective is to stabilize the trajectory of public debt. The restructuring of privately held debt (PSI) carried out in 2012 and the renegotiation of interest payments on loans granted by the EU in 2013 have already significantly reduced annual interest payments on Greek debt. In addition, Greece is expected to have a balanced primary budget balance (excluding interest payments on debt) in 2013 and a surplus of 1.5 percentage points of GDP in 2014, according to the IMF. There is still a long way to go, but Greece has come a long way, with the primary balance at 10.5% of GDP just four years ago. The country also has the advantage, compared to other peripheral countries, of having a debt problem that is mainly concentrated in the public sector. Greek private sector debt stood at 124% of GDP in 2011, compared to 281% in Ireland, 223% in Portugal, and 204% in Spain.
The structural program conditional on the IMF loan to Ireland expires at the end of the year. Can we conclude that it has been a success and that Ireland’s economic activity is on a sustainable recovery path?
BK – In my opinion, it is a little too early to claim victory in Ireland. The country has considerable assets (a flexible labor market, a developed export sector), which have enabled it to regain the confidence of the financial markets fairly quickly. Today, the yield demanded by investors for Irish government bonds is lower than that for Italian bonds. Paradoxically, Ireland’s public deficit will be the highest in the eurozone in 2013 (at 7.5% of GDP), and its public debt is at the same level as Portugal’s (at 123% of GDP). The banking sector is still burdened by a large amount of bad debt, in a context of low profitability. While the export sector continues to expand rapidly, domestic demand remains severely depressed after three years of austerity. Real estate prices are stabilizing, but only after falling more than 50% from their peak in 2008. The unemployment rate is falling, but remains very high. GDP growth was sharply revised downward in 2012 (from 0.9% to 0.1%) and has been falling for two quarters. The outlook is improving for 2014. The IMF forecasts GDP growth of 1.7% after 0.6% in 2013. However, in this still difficult context, the Irish themselves find it hard to understand why they are considered a model country.
The peripheral countries have been rather shaken up in recent years on the financial markets. Can we hope that they will now be spared a little? Is a return of Portugal to the markets in 2014 conceivable?
BK – In Portugal, the 2014 budget is very ambitious (a 2.3 percentage point reduction in the deficit as a share of GDP). The objective remains the same: to strengthen the government’s credibility with foreign investors. However, some measures in the 2014 budget may have to be reviewed by the Constitutional Court. The Court plays a relatively important role in Portugal, and although it does not question the deficit reduction program, it has so far appeared much more unfavorable towards measures targeting spending than towards tax increases. Portuguese sovereign interest rates have fallen since the political crisis of July 2013, but remain very high (at 6.1% on October 25). The government’s financing needs are covered for 2013 and much of 2014. However, €10 billion will still need to be financed in 2014, while the Troika’s aid program ends in June. To ease the transition back to the markets in 2014, the government could request a precautionary credit line from the European Stability Mechanism (ESM). The terms of the credit line have yet to be finalized and may change if Portugal decides to draw on the funds made available to it. This financial assistance instrument has never been used before. The Portuguese are closely monitoring developments in Ireland, where the bailout program ends on December 15.
