Eurozone Debt Crisis: How worse can it get in 2012?

As discussed in the earlier post, the current situations prevailing in Europe are more likely to worsen in 2012 than they have the chance to head for the better. However, I know taking directional calls on economies of such scales isn’t a wise thing to do as almost certainly things always pan out in a different order. So, rather than betting on a particular trend, in the last post we discussed about the prevailing situation and key challenges,  in the next post we shall talk about some still possible positive outcomes for Europe, and this post is all about the worst that can strike the already struggling  eurozone  in 2012.

Keeping Greece and Italy afloat: Mounting Budgetary Pressures

Whether they like it or not, but Greece and Italy will have to go through a rough patch of economic and social reforms that the supporting nations will force on them. There is no escaping from the fact that the percentage of debt to GDP in both these nations is signaling a default situation anytime soon. The only way they stay afloat is by rolling over the debt, which investors are only willing to take at significantly higher interest rates. Well, even if these nations are able to sell their debt, it will only buy them more time, and the real problems remain far from over.  Paying higher interest rates in efforts to stay afloat further raises the challenges for these nations as then their budget flexibility is largely capped.

Austerity Programs may be short-lived: Are Defaults Inevitable?

At the same time these countries will find it difficult to run on austerity programs for too long if the sentiment switches and taking the default load becomes inevitable. Defaulting will mean significant cut in respective government’s ability to stimulate the economy as then they will have to work with much tighter budgets.

As a result of the above scenario both these nations, who at present have stringent laws and regulations for the businesses in general, will have to go through serious reforms and considerable liberalization.  All this is bound to change the very ways of how the businesses operate in these nations. The real deal with above mentioned scenario is that it will take much longer than 2012 to make these nations stand back on their feet as making reforms and liberalization process isn’t as quick as pumping in liquidity.

If the scenario discussed above went over your head then you might understand the simple reasoning stated below which clearly suggests that the worst is not yet seen in the European crisis.

Seriousness of the crisis for the Layman

The magnitude of this crisis in itself is something that cannot be fixed in a short span of time. It involves various nations and quite arguably fixing debt related issues of all these nations at one point in time is something next to impossible. Greece will require much more financial aid than that is readily available. Italy has bought itself some time but that’s not sufficient make a turnaround. Spain cannot become a growth engine overnight, and not even in the long run will it be anywhere close to compete with export oriented nations in Southeast Asia and China.

In this changing global scenario, most of the developed nations are focusing on getting more competitive in the exports market, but they cannot match up with the developing markets’ cost effective export oriented structures anytime in the visible future. And after all, there isn’t enough demand for everyone to compete.

 Next: A Glimmer of Hope for Europe in 2012: Is the worst really over? 

Previous: European Debt Crisis: A setup for Global Collapse?

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