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Is time on Europe's side? [ClearOnMoney]
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Is time on Europe's side?

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Commentary

Is time on Europe's side?

20 Sep 2012 by Jim Fickett.

On the one hand, debt is getting worse, and at least a partial default is likely. On the other hand, austerity is succeeding in correcting some of the problems that led to the crisis and, with reduced debt, the countries in crisis might be able to stand on their own.

Since Europe's politicians are so good at doing just enough to postpone the crisis just a little longer, one has to wonder, is time on their side? The answer is interesting.

On the one hand, the countries in crisis still have budget deficits and are in recession, so debt is getting worse. Further, there is little evidence that, with high debt and high interest rates, Greece (and some others) can ever catch up and really pay off the debt. From this perspective, no, time is not on their side.

On the other hand, a German report at the end of last month pointed out, in essence, that Greece and others had improved unit labor costs and current account deficits sufficiently that, with reduced debt, they might be able to stand on their own.

Spiegel reported,

The study by the Association of German Chambers of Industry and Commerce (DIHK), commissioned by the Financial Times Deutschland newspaper, showed that the countries in crisis are becoming more competitive, based on two key indicators.

According to the study, unit labor costs have fallen significantly in Greece, Ireland and Spain. Labor costs particularly fell in Greece, dropping by about 15 percent since 2010, according to the study.

Deficits in national current accounts – the difference between the value of exports and imports of goods and services – are also shrinking in most countries. The report revealed that Greece reduced its current account deficit by 54 percent between 2008 and 2011. …

Spain and Portugal cut their current account deficits by 50 and 40 percent, respectively, between 2008 and 2011, according to the study. Italy managed to reduce its trade deficit to almost zero in the first half of this year

And the Financial Times commented,

As the wheels of diplomacy whir on, the cogs of the Greek economy are grinding out a new reality. Austerity and a European slowdown have depressed the economy and kept pushing headline deficit goals out of reach. But Athens has done more than many think. Unit labour costs are falling and the primary deficit – before debt service costs – is almost gone.

The politics of the rescue will change markedly if Athens reaches primary balance soon. It will not need help to pay wages and pensions; rescue money will only fund payments to creditors. A funding cut-off would be less devastating than earlier. It would lead to a forced restructuring, to be sure, but would be less traumatising than with a big funding gap.

Crucially, default need not lead to an exit from the euro. Once the ongoing recapitalisation of Greek banks is complete, and especially if the eurozone makes headway on banking union, there will be nothing for Athens to gain from an exit even in case of default.

So this suggests that austerity, while making the debts worse, is also turning around the situation that led to the crisis. And it suggests a way through – once things have gone a little further, a debt restructuring could lead to a genuine new beginning. And, the way things are going, the debt restructuring might well be hidden enough to be politically palatable, say as unrealized losses on the ECB balance sheet, paid back over a long time period, out of sight.

In this sense, yes, time is on Europe's side, and it does seem as if the long, long, string of mini-crises might possibly have a happy ending.