The main impact on the Eurozone of Greece's debt issues has been primarily through the Euro, which has weakened sharply as the crisis has developed and concerns increased over Greece's ability to meet its obligations.
Under pressure from the Eurozone, Greece announced a package of austerity measures in an attempt to significantly reduce its debt levels over the next couple of years.
Furthermore, a rescue package has been agreed by the European Union and in particular Germany and France, alongside the International Monetary Fund (IMF), to provide financial aid for Greece. However, Greek bonds remain under pressure as fears remain that the austerity measures and the aid package will not be sufficient to counter the debt problems and to enable Greece to meet its financial obligations, thereby raising the possibility of a sovereign default.
This has led to the cost of their debt continuing to rise sharply to record levels, and taking into account the recent cut in their credit rating by Moody’s and an increasing budget deficit, the Greek government has just requested access to approximately £39 billion of the financial aid package.
The debt issues in Greece have also led to fears that the same issues could be felt by other perceived weaker members of the Eurozone, namely Portugal, Ireland, Italy and Spain. These countries are also suffering from debt and budget deficits with Portugal in particular seeing its bond yields rise and there is now increasing pressure on each one to bring its finances under control.
Elsewhere, the economic picture in the Eurozone is more mixed with the release of both positive and negative data. As already mentioned, the weakening of the Euro has not been solely negative as it has provided a boost to export-orientated nations such as Germany and sentiment towards this sector has certainly improved in recent months.
Both the French and German economies pulled out of recession last year earlier than the UK and although GDP growth for the region was 0.3% in the third quarter of 2009, it was flat in the fourth. Domestic demand showed only sluggish growth while consumption remained flat, but investment actually contracted for the period. There was a positive contribution from net exports and this should be the case in the first quarter when taking into account the weaker currency. Data for the first quarter of this year indicates that domestic demand remains weak, but external demand continues to provide support. Overall, GDP is expected to show only meagre growth in the first quarter of around 0.2%, particularly as investment demand is believed to have contracted further with the harsh winter.
Annual inflation, as measured by the Consumer Price Index, rose sharply in March from 0.9% to 1.5%. This was much stronger than expected and inflation is now at its highest level since December 2008. In Germany, inflation was also above the consensus view as it rose from 0.5% to 1.3%. As with other global economies, energy prices and particularly the higher oil price had a large impact on the sharp rise in inflation. Inflation is expected to rise further in the second quarter, providing the oil price remains stable the increase is unlikely to be as sharp as in March.
Business surveys have been fairly positive of late with industrial production benefiting from the strong external demand. Although the weak domestic demand may have a negative impact, industrial production is expected to be strong for the first quarter, but it is likely to slow in approaching quarters.
The Eurozone, like most other developed regions, is also suffering from high unemployment. The unemployment rate recently hit 10% for the first time since 1998 and this was despite the German figure showing a surprise fall. Spanish unemployment is the highest at 19% while Germany and France have rates of 7.5% and 10.1% respectively.
Richard Wallis is head of research and investment at Origen
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