The World Economic Forum held its annual meeting two weeks ago, from January 27-31 in Davos-Klosters, Switzerland. The forum focused on global growth, developing countries, and sustainable growth worldwide. It served as an opportunity to voice concern, one of the predominant being potential civil unrest.
Following the realization of a credit crisis in Greece, and the currently destabilizing economies of what is referred to as PIIGS (Portugal, Ireland, Italy, Greece, and Spain), it is becoming clear that the domestic populations are far from pleased. As a result of the recent Greek crisis, the EU has placed strict guidelines in place for a domestic handling of the situation. They are putting pressure on the country to reduce their deficit to 3% of GDP by 2012, a move which is currently generating massive resistance from the working class. George Papandreou, the current Prime Minister, has imposed substantial pay cuts for all public sector employees making over €2,000 a month. The cuts will begin at €500 net per month, per worker. The government is also considering raising the retirement age, and cutting jobs. In Greece, tax officials staged a 48 hour strike on February 4, nearly 14,000 workers refused to work, and blocked entrances to the economy and finance ministries in Athens. ADEDY (Civil Servant’s Confederation), a public sector union, is planning strikes on the 10th and 17th of this month (OLME, the high school teacher’s union, will be joining). For the last three weeks, farmers have been blocking the main highway between Athens and Salonika with tractors. They are protesting the lack of investment in farming technology, seeing as the government has pulled nearly all funds from the agriculture sector.
Spain has also been hit hard by the recent economic crisis, and protests have already been planned for February 23rd, when the government will vote to increase the pensionable age from 65 to 67. The two national labor unions, the UGT and CCOO, are currently meeting with other unions around Spain to coordinate larger protests, as Spain modifies its domestic policy, to deal with their impending debt crisis. Spain has seen tremendous economic decline in the last year, with its current debt-GDP ratio having doubled to 55%. The national deficit is 11.4%, highest in the euro zone (behind Latvia), and the national unemployment is 18.8% (average is 9.5% in the euro zone). The most troubling number discussed at Davos however was Spain’s 42.9% unemployment rate for 16-24 year olds. Officials are concerned about potential economic growth, and the current young working class is far from able to support sustained government spending (such as pensions). This staggering number is evidence of potential civil outburst, something government officials are doing their best to avoid. However, Spain has not been able to create more jobs, and the upcoming pension age increase will only further hurt young adults from finding work.
According to the Eurostat Press Office, unemployment numbers throughout the EU have been steadily increasing over the last four business quarters, with the unemployment for those under 25 increasing at significantly higher rates. The average unemployment rate in the euro area (EU16) for 2009 was 8.2%, however when looking at only ages 16-25 the number jumps to 18.3%. These numbers, combined with the impending EU/IMF bailout of Greece (potentially not the only nation to require a bailout) a putting additional stresses on the government, as a recent poll for Germany’s Bild am Sonntag newspaper showed, 53% of Germans would prefer expelling Greece from the euro zone, and 67% opposed any sort of internal EU bailout. This is just the tip of the iceberg, financially and socially.
Governments are reforming their economic policies, but meeting staunch resistance from domestic labor forces. The EU has made their economic regulations clear (with euro-zone nations needing to meet 3% debt-GDP), but EU requirements, as they begin to be enacted, only show the world how fragile these countries have become. Greece’s current CDS spread and bond yields are based purely on speculation: with BlackRock Inc. claiming everything will be resolved without any loose ends, and Société Générale boldly assuming the Euro will break up within the next year.
One of the primary problems with the EU, as Société Générale notes, is that it is a broad economic pact, which is difficult to apply to such a broad range of economies. France and Germany see very stable economic trends, while countries like Greece and Spain borrowed heavily upon gaining admittance to the currency, and now the debt has come due. Over the next few years, we will see if the Union is strong enough to survive economic misconduct, and avoid a Lehman-like collapse with Greece being the catalyst.
