You may have heard this one before, but apparently some countries in the Eurozone are struggling to raise the necessary monies they need. Keep this one quiet, we certainly don’t want to create a panic, but it appears that when Portugal went to the bond markets this week in an attempt to raise some more readies, some feared it wouldn’t be successful.

Then yesterday, Spain and Italy were busy selling bonds, and once again (shhh) one or two investors had their doubts.

But fear not. Just as some feared Spain was on the verge of holding out the begging bowl and asking the IMF/EU/ECB to put their hands in their pockets and lend it money that they couldn’t comfortably afford, along came China and asked: “Can we help?”

Good old China. Out of the kindness of its politicians’ hearts it offered to save Spain from the abyss.

But now an EU politician has only come along and said China may have an ulterior motive.

The cynical politician was Herman Van Rompuy, no less; Europe’s president. He said: “When they buy euros, the euro becomes stronger and their currency a little bit weaker. That is not neutral in regard to their competitive position. But I go no further in this topic. It could be too delicate.”

Shock, scandal! China has a selfish reason for trying to help Spain. And there was silly old us thinking China was just a country of philanthropists.

Anyway, some are now suggesting the offer to Spain is just another attempt by China to prop up the yuan. You see, if the euro collapses, the yuan will look expensive.

Well, call us naive if you wish, but is it not the case that a collapse in the euro, leading to a possible European-wide debt default, will be bad news for a lot more countries besides China? In the long term such a collapse could be a good thing, but in the short term, well, just thinking about the ramifications brings back memories of the collapse of Lehman Brothers.

We kind of thought that China’s rationale for offering to assist Spain was precisely because she felt it was in her interests to avoid a new economic meltdown in what is perhaps her most important export market. Or are we being a tad indelicate? 

Portugal went along and did it yesterday. It successfully sold 1.25bn euros’ worth of bonds. Markets had expected its sales push to fall flat. Well done you, Portugal. Mind you, the interest rate it is paying on these bonds is an average of 6.719 per cent. Compare that to the yield as of this morning on ten-year UK government bonds of 3.64 per cent, or 3.04 per cent for German bunds.

So Portugal keeps insisting it doesn’t need help. When she joined the euro its populace were pretty chuffed. To them it felt as if their country had joined the Premier Division, and they were proud of their new status. And maybe it is this same pride that is stopping Portugal from holding its hands up, and saying, Okay, we need help.

So, it could go to the EU, and could avail itself of the money it needs, and would almost certainly pay much lower interest rates. Its pride might be hurt, but in other respects it would be the winner.

Of course, one solution to the problem facing the likes of Portugal might be these euro bonds. The bonds are issued on behalf of all Eurozone countries, and as a result Portugal and co. will pay much lower interest rates.

But Germany doesn’t like that idea. You can understand why. Germany, the frugal country that made such sacrifices to fund reunification is pretty unenthusiastic about any kind of bailout.

But then it’s a little puzzling. On the one hand we are told the Eurozone cannot fail, and no country will default. On the other hand, euro bonds are quashed. Well, which one is it? You can’t have both.

That’s why the celebrated economist Kenneth Rogoff, co-author of the highly acclaimed book “This time it is different”, said in the FT this morning: “Eurozone macroeconomic policy is incoherent on so many levels, it is hard to know where to begin. The basic strategy is to hope that fiscal tightening in the periphery combined with generous liquidity relief from the core will solve all ills. The only problem is that the populations of Greece, Ireland, Portugal and perhaps Spain, cannot be asked to suffer recession indefinitely so that foreign creditors can be repaid. Rather than contemplate reintroducing the drachma, the eurozone decided to celebrate the new year by taking in Estonia. Estonia is a great country, and it deserves a lot of support. I grew up on Estonian grandmaster Paul Keres’ chess books. But did it really make sense to add another emerging market at this time?” See: Euro looks set to win the race to the bottom http://www.ft.com/cms/s/0/bd4a8af0-1e59-11e0-bab6-00144feab49a.html#axzz1AoBm2GVu

Meanwhile, data out yesterday showed that Germany expanded by 3.6 per cent in 2010 – at least that’s what the provisional figures say. It was the fastest growth rate since reunification. Mind you, it wasn’t enough to reverse the contraction in 2009, when the Germany economy shrunk by 4.7 per cent.

German exports grew by 14.2 per cent, but household spending was up by a paltry 0.5 per cent. For as long as Germany’s growth in GDP outstrips growth in household spending, Germany is adding to global imbalances, and probably making the problems in the indebted bits of the Eurozone worse. And yet, Germans are scared that tax will rise to fund the bailout of Greece, Ireland, Portugal, Spain and co. As they are scared they spend less, making worse the problems in those same countries that they are so worried about.

Portugal is raising itself 1.25bn euros today. And it may be forced to hold out the begging bowl and ask the EU/ECB /IMF for help.

The real worry is that her government is insisting all is okay and there is no need to ask for help. Unfortunately, the lesson of 2010 seems to be that the time to panic is when governments say there is no need to panic. Both Greece and Ireland denied they needed rescuing, right up to the moment they were being given the economic equivalent of mouth-to-mouth resuscitation.

But regardless of whether Portugal is forced to go asking for help today or not, over the course of this year around 25bn euros’ worth of Portuguese government bonds mature. It seems inevitable that sooner or later she will wave the white flag.

But frankly, authorities can fund a bailout of Portugal without breaking sweat. In all it is thought Portugal needs around 45bn euros over the next two years. Frankly, the EU/IMF/ECB can not only afford to lend her that money, they can afford to re-lend it a few years later if Portugal needed to borrow more money to pay off the interest on her previous loan. For that matter, much the same can be said of Ireland and Greece.

Even if Belgium succumbs, the finance can be made available without too much hardship. The fear relates to the danger it will be Spain, or worse than that, Italy. Authorities are determined that the euro will survive, but if Spain and Italy fall under the market’s spotlight, and frankly in recent days the spotlight has been getting very close, then surely no amount of political will can stand in the way of at least some countries being ejected, or voluntarily leaving the euro.

Meanwhile, in Germany, it seems that later today we will be told 2010 was one fantastic year for the German economy. We will know more later.

You could understand a certain amount of schadenfreude coming from Germany, but actually we are seeing quite the opposite. German consumers are so worried about the eurozone debt crisis, and the danger that Germany will have to pick up the tab, leading to tax hikes, that they are holding back on their spending.

It is quite ironic. If German consumers spent more, we would move a big step closer to seeing economic stability in the Eurozone. In reality, German consumers are still proving a frugal lot, precisely because they fear economic instability in the Eurozone.

And finally, there’s Japan. The last few days have seen two reports out of Japan, the Coincident Indicator, and the Leading Indicator. They both suggest the Japanese economy contracted in Q4 last year. Japan’s economy expanded by a brisk pace indeed over the last year or so, but alas, it appears there is a good chance she has fallen back into recession.

One of the bits of maths that has started gaining circulation is that an average Irish family on welfare will be 7 per cent worse off as a result of the recent austerity budget. Imagine that, a family who one assumes is already struggling to get by, is about to be worse off to the tune of 7 per cent.

Ask yourself this question: what will happen to an economy which suffers from substantial levels of household debt, is experiencing falling house prices, and will see families take a cut in income?

This is what we reckon. Some of these households will not be able to afford their debts. So we will see a rise in bankruptcies, and Irish banks will get into even more trouble.

Then there is the cost of the EU/IMF bailout. Sure, the money is being provided, but at what cost? The interest rate is to be 5.8 per cent. According to a piece in Spiegel online, if the Irish government avails itself of all the bailout money it has been offered, the interest payments alone on the debt will come to 8.5bn euros a year. To put that in context, the austerity budget involves plans to elicit savings in public spending of around 10bn euros.

So thanks, EU and IMF. The money you have provided to Ireland is being supplied at such an interest rate that the task of cutting debt is being made all the more difficult.

Of course, if an economy’s growth exceeds the growth in its debts, then things are manageable. So for example, if you are heavily in debt, but your income is rising fast, then actually your debt won’t feel so bad, at least over time. The key lies in the growth in your income exceeding the interest you are paying on your debts. But the Spiegel article quoted David McWilliams of the Belfast Telegraph as suggesting that the Irish economy must grow by 8 to 10 per cent a year, or it will descend into a debt–deflationary spiral.

And the more Ireland seems to do to cut its debts, the more the credit rating agencies downgrade its credit rating.

So why not default? Jeremy Warner used his Telegraph column to argue yesterday that we are all too flippant about defaulting. That defaulting is unfair on lenders. “For every pound saved by the borrower,” argued Mr Warner, “there is a pound lost by the saver. The thrifty and responsible are being obliged to pick up the tab for the irresponsible and the feckless.” See: Someone forgot the poor lender in all this talk of debt forgiveness. But Mr Warner overlooks one important point. Ireland’s government debt was actually quite modest until she agreed to guarantee her banks. The massive debt burden carried by the government has been caused by its banks’ recklessness. And now the burden of this is falling on people on welfare.

So what would happen if Ireland let her banks fail? Answer: this would be a catastrophe for banks across Europe. German and British banks would face a new crisis as their exposure to their Irish friends is revealed.
But, truth is, the rest of Europe has got just as much to lose from Irish banks going bust, as Ireland has. And yet the EU and IMF lend Ireland the money to prop up Ireland’s banks at an interest rate that is roughly double the yield on German government bonds.

The best thing that can happen is for the Irish government to suddenly decide there is a real danger she will lose this week’s vote, and go back to the EU and IMF and say that parliament can be persuaded to accept the EU/IMF terms only if the interest on the loans is much, much lower.

Ireland’s bargaining position is actually quite strong. And it is time she used this to her advantage.

The big fear was that Ireland’s government, which holds power by only a very small margin, would lose the vote and the budget would be rejected. And if that had happened, the EU bailout package would have been cancelled.

So with the news of the positive vote, you would have thought markets would have celebrated. Instead, they just scowled at Ireland and waited to see what would happen next.

And the Fitch rating agency came along and downgraded Ireland’s debt to BBB+. Sure, no doubt when you were at school any grade with a B+ in it was good. But for sovereign debt, this rating is not so pleasing.

Poor old Ireland. The more she does what the experts say she should do, the worse her credit rating.

Of course, one could ask what do these rating agencies know anyway. After all, they were busy giving their clients, the world’s banks, glowing credit ratings right up to the moment they had to be bailed out. But let’s not be too spiteful. Presumably the rating agencies do get things right occasionally.

The disadvantages to Greece in exiting the euro are pretty clear cut. The new drachma would crash, and Greek debt valued in euros would soar. That’s not just Greek government debt, but corporate and household debt too (although Greek household debt is thankfully quite modest). Default will be inevitable. The markets will then become terrified of lending to Greece in the future. As the drachma falls, Greek inflation will rocket, interest rates will go up. Recall what happened in the UK in 1967, when Harold Wilson argued a deprecation in the pound will not affect the pound in “your pocket”. But he was wrong, and UK inflation became embedded. Arguably, it took Thatcher austerity, and harsh recessions in the mid 1970s and another a few years later, before the UK finally regained competitiveness.

When we talk about the disadvantages of an exchange union, people often refer to sterling’s ejection from the ERM in 1992. It is widely agreed today that this turned out to be a good thing for UK PLC, but it is less certain that the ejection of the Italian lira was such a good development.

And yet, to save the euro, politicians have got their work cut out.

Now, Jean-Claude Juncker, Prime Minister of Luxembourg (who recently called for a new Euro-bond as a way to fund debts within the Eurozone), and Angela Merkel have had a falling out.

Mr Juncker’s idea was covered here recently (see: Euro-bonds idea is like an ostrich that buries its head even deeper into the sand ), but essentially his idea was for a new European debt agency to issue bonds on behalf of all the Eurozone countries. That way, bond investors could feel more secure in lending to the Eurozone, safe in the knowledge that their debts were being paid by the entire region – including Germany.

Mrs Merkel didn’t like that idea at all, prompting the Belgian PM to call the German chancellor “un-European”, and, worse than that, “a bit simple”.

Now of course it is one thing the WikiLeaks reporting US diplomats saying Mrs Merkel “isn’t very imaginative” – a description some may say is a compliment, but to call her “simple”, well, that seems a tad insulting. In fairness, the Belgian PM was referring to her analysis, rather than her personage, but even so.

And now our Gordon has joined the fray. You may remember him. For our younger readers, he was chancellor in the UK for ten years, and for most of that time was heralded as one of Britain’s greatest ever chancellors. Alas, he moved next door and became known as one of Britain’s worst prime ministers, and then his legacy as a financial minister was ruined too. Anyway, that bit of political history aside, our Gordon has told the Beeb’s Robert Peston: “I sense that in the first few months of 2011 we [will] have a major crisis in the euro area.”

Meanwhile, returning to Germany’s Iron Lady, talk is that at a dinner including all the leaders from the EU, she said: “If this is the sort of club the euro is becoming, perhaps Germany should leave.”

And so, you are up to date with the latest shenanigans within the Eurozone.

And of course its defenders are right. The end of the euro would be disastrous.

The trouble is, the continuation of the euro would also be a disaster. It seems hard to see how Greece, Ireland, Portugal and co. can avoid a decade of wage deflation. Either that, or they will suffer sky high unemployment and the EU will have to fork out for their unemployment benefit. Or maybe both.

If the euro stands as it is, the result will be that some of the region’s more indebted countries will end up suffering the economic fate of Detroit.

Maybe the best idea we have heard is the one from Joseph Stiglitz calling for Germany to leave the euro; see Germany may pull out of Euro, predicts Joseph Stiglitz

PS
By the way, famous (or is that legendary investor Jim Rogers  recently said: “I don’t expect the euro to be around within 10 to 15 years.”

Despite the best efforts of the European Financial Stability Facility it was evident that even before the ink had dried on the Irish bail-out agreement that the contagion could not be contained.

Immediately nervous investors began looking to other Eurozone countries, such as Belgium, Italy, Portugal and especially Spain fearing the same issues that dragged Ireland down will resurface elsewhere. After all it was not the state’s inability to borrow (Ireland is well funded until well into 2011) but the inability of Irish banks to refinance their borrowing in the wholesale markets that triggered the bail out.

But could Spain’s banks face a similar problem?

At present the response from Spain seems to be bullish with the country’s Economics Minister, Elena Salgado telling CNN that the eurozone’s fourth biggest economy has “absolutely no need” for an Irish style rescue. This was then followed by the extremely brave statement of Snr Zapatero that speculators betting short against Spain would “lose their shirt” and that the government is already doing enough to avert a debt crisis.

Whilst this may seem like an admirable attempt to re-assure and calm the markets it ignores the hard facts that underlie the current situation. Barclays Capital reckons that combined, the Spanish sovereign and Spanish banks need to raise €73bn in the first four months of 2011, some half of it in April 2011 alone.

These figures in isolation don’t seem to point to bail-out territory but when you take into account the fact that Spanish bond yields are at their highest in 8 years it’s clear that more than words are required to attract investors. The speed of the increase in yields from 4% to 5.2% in a month is a dramatic shift for bond markets which usually move in small doses. It means Spain’s bonds are slumping in value and holders are dumping them as they’re worried they won’t get all their money back.

So what is it that is spooking these investors? The country has made big efforts to scale back spending by central government and the national debt this year will be 60% of GDP – not great but not as bad as Ireland’s near 100%. But as Victor Mallet points out in the FT there’s a lack of clarity about the figures as despite the “strict limits” the debts of the country’s 17 autonomous regions (104.8 bn euros) account for over half of the public sector deficit which makes it much more difficult for the central government to impose reforms. “Spanish sovereign risk is increasingly at the sub-national level” says Nicholas Spiro of Spiro Sovereign Strategy and several regions including Catalonia and Madrid have such financial difficulties that a recovery seems unlikely given the economic stagnation and sluggish growth forecast for Spain.

It’s also in the regions where the problems for the banking systems lie. Spain experienced a huge property bubble, accompanied by a huge rise in private sector debt, and fell into recession when that bubble burst. But whilst the larger national banks such as Santander were well capitalised (and even in a position to acquire troubled foreign firms), in the regions the cajas (regional savings banks) have accumulated vast exposure to the construction and development sector. When the big two banks (BBVA and Santander) put the brakes on in 2006-07, the cajas continued lending more keenly, tapping wholesale debt markets to fund themselves. That alone makes them higher risk. But the savings banks also supplied about half of the €318 billion borrowed by Spain’s property developers. These loans now represent about a fifth of the cajas’ assets, according to Santiago López Díaz, an analyst at Credit Suisse. They are deteriorating fast.
So now the cajas are undoubtedly facing the grimmest outlook for sometime in what is already an extremely volatile situation. The results of the stress tests earlier in 2010 were supposed to have calmed fears but investigation revealed that much of the supposed liquidity in the regional banks was due simply to the over-valuation of much of their repossessed housing stock. A recent survey by the Economist estimated that Spanish property is still over-valued by 47.6% which suggests that a painful correction is on the way.
Indeed events of the last few days have only made this more likely. New accounting rules by the Bank of Spain will force lenders to dump depreciating assets, according to Bloomberg News. Under the changes, banks must now make provision for bad loans after just 12 months rather than the current 72 months, which will provide a strong incentive for lenders to sell properties quicker. The rules also force banks to value properties more realistically, which gives them a further incentive to sell.

Pisos Embargados de Bancos estimates that there are around 100,000 bank owned properties currently on the market but they estimate that this figure will rise to 300,000 next year.

Obviously this change in provisions has been designed to force banks to raise capital through sales of their property assets which would also provide a boost to domestic demand. The hope being that this income will negate the need for extensive bail-outs. However the release of this vast stock of property onto the market will drive prices down sharply and Fernando Rodriguez from Madrid-based property adviser RR de Acuna & Ass predicts a further 20% fall next year.
The danger here is that the property stock valuation is the only thing that gives the balance sheets of the cajas any respectability. Decrease these assets by 20% and many will be looking extremely vulnerable – and with no chance of borrowing on a nervous bond market the only solution will be to seek European aid.

Until now the response from the banks has been distinctly Canute-like, vaingloriously attempting to turn back the tide of falling prices by using their market power to artificially inflate prices.

The method which the banks use to have higher than open market price accepted as the appraisal benchmark for valuations of their property assets, starts with how the banks dispose of the homes they are currently repossessing. The banks are using subsidised mortgages which typically also include 100% mortgages, non-payment windows, extended terms (even up to 50 years) and interest free options to attract buyers. These mortgage deals are being granted at a subsidised interest rate totally at odds with market rates being offered for deposits. Typically, these subsidised mortgage rates are offered at just 0.3-0.5% over Euribor, whilst deposit rates offered by the same financial institutions are currently around 4%.

The purpose of these subsidised mortgages is to encourage the purchase of bank repossessed homes at valuations that are higher than current open market prices. Indeed they are available only in conjunction with repossessed homes held by the bank offering the mortgage, whereas privately sold homes in the open market must apply through the usual channels for normal mortgage deals, which are typically 65% of value, 25 years and normal market interest rates.
Anecdotal examples show properties with a subsidised mortgage are between 25-40% above the open market price. In October 2010 in El Rosario, Marbella, a 2000m2, frontline golf villa was sold by CAM Bank which had an asking price on their website of 1.3 million euro but were, in reality, looking for offers of 750,000 euros – however the final sales price was 601,000 euros – a difference of 54%. Another example in Santa Maria Village, Elviria was advertised by a bank at 269,500 euros but sold at 188,400 euros – a difference of 31.1%.
In effect the valuations of the bank’s property assets are supported by the banks own sales data of their repossessed homes, which are artificially inflated prices by the provision of subsidised mortgages. The result is a self perpetuating cycle where property values are kept high which in turn supports the bank’s approach to provisions against non-performing loans being required only at a low level.

But with 1.4 million homes to sell this response looks remarkably inadequate, indeed many investors point to this practice as being one of the main reasons it’s impossible to judge the real price of property in Spain today – as it over-inflates the official figures so the real price of Spanish property is never reliably reported.

2011 may be the year we finally find out.

The latest idea from the EU would appear to be akin to the latter approach. And guess what? It won’t work.

Forget the analogy with ostriches for the time being, and instead see a comparison with a building. The building is in danger of collapsing. You can strengthen the foundations and spend a fortune on repairing the building, or you can knock it down and start a new one. Quite often it is better to go for the second approach. There are exceptions. Take Venice. You could let St Mark’s Square sink into the sea, and then build a new square resplendent with modern architecture with gherkin type structures replacing the Doge’s Palace. But most would think that is a bad idea.

The euro is creaking. It is not fit for purpose. The one-currency-fits-all approach is creating a crisis that is looking more serious by the day. So you can strengthen the euro, introducing new schemes to make it impossible for the currency to collapse. Or you can let it go, and see the emergence of a new system.

Some Eurozone politicians seem to think the single currency is like Venice: that letting it fall would be akin to feeding the gondoliers to the sharks and replacing the Rialto Bridge with a tunnel under the Grand Canal. And indeed, for some politicians, the failure of the euro would be for their careers what the sinking of Venice would be for the Italian tourist industry.

But for the people of Portugal, Ireland, Greece and Spain. And maybe for the people of Italy and Belgium, and who knows, maybe France too, the euro is not like that famous city in northeast Italy criss-crossed by canals. And if the powers that be have their way and find new ways to prop up the currency, instead of Venice, indebted Europe will become more like Detroit.

The big idea is for a new type of bond: an E-bond, issued by a European debt agency. Jean-Claude Juncker and Giulio Tremonti put their ideas down in the FT: “Time is of the essence,” they said, and added: “The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state.” See the FT

They say: “Europe must formulate a strong and systemic response to the crisis, to send a clear message to global markets and European citizens of our political commitment to economic and monetary union, and the irreversibility of the euro.”

Their idea is well thought through, and they have made some effort to get around the problem of moral hazard.

But their idea is based on the false premiss that the euro must be saved.

PS The ostrich, apparently, does not bury its head in the sand at all. This is a myth. It is a shame that supporters of the euro are more ostrich-like than ostriches.

That strikes us as quite a lot of money.

Ireland has a double problem with this loan. At 5.8 per cent interest, the cost of repayment is simply huge. The yield on UK ten-year government bonds was 3.35 per cent last night. So presumably the UK government can make a healthy profit, borrowing at less than 3.5 per cent, and lending out at just under 6 per cent.

But is the debt really affordable at that level? To put the Irish bailout into perspective, Ireland’s GDP in 2009 was around $227bn. In other words, the loan is for around half of its GDP. When you consider that the Irish government’s total debt was around 65 per cent of GDP at the end of 2009, it just goes to show what happens when you let a housing market boom beyond any sense, and have a banking sector that dishes out money sure in the knowledge the money is safe because it is backed by property.

Meanwhile, the Eurozone crisis is pushing down on the euro. Well, let’s face it, one would be surprised if it didn’t. Last night there were 1.3242 euros to the dollar. Back in September the euro was more expensive than that. In other words, this is what has happened. The Fed has unleashed a massive bout of quantitative easing, and the dollar is now marginally more expensive today than it was three months ago.

It just goes to show that if there is one evil that is worse than printing money faster than Ben’s helicopters can drop it, then that has to be not printing money. Maybe if the European Central Bank had engaged in QE of its own, then the Greek contagion wouldn’t have spread even as far as the securitised Parthenon, let alone to the rest of Greece and beyond.

On the other hand, maybe QE disguises the truth.

Take average compensation for employees in the private sector since, say, 1993. Since then, compensation for Germany has risen by 28 per cent. In France compensation has risen by 50 per cent; Belgium by 57 per cent; Italy by 62 per cent; Spain by 85 per cent; the US by 85 per cent; Ireland by 86 per cent; the UK by 92 per cent; and Portugal by 204 per cent.

In fairness, Germany’s growth in productivity was quite low, whereas the US, the UK, Portugal and Ireland all enjoyed faster growth in productivity. Although, worryingly, Spain didn’t. But even allowing for productivity growth, the fact is, this differential was nowhere great enough to justify the higher wage inflation in any of the countries mentioned.

So what can we conclude?

Ireland, Spain and co. are now being forced to grapple with the horrendous problem of repaying debt, while letting wages fall so that their economies are competitive with Germany.

The UK and the US, thanks to the voodoo called quantitative easing, are not being forced to do this.

In other words, the government it does not have is in big trouble.

But before you start rattling off jokes about famous people from Belgium, it maybe be worth taking a slightly closer look.

Belgium has hit the headlines because the cost has soared for insuring Belgian government bonds against default. At the end of last year the Belgian government’s debt was 97.6 per cent of GDP, meaning that of the Eurozone’s troubled economies, it is in the bronze medal position for size of debt, behind Italy and Greece.

The good, and somewhat surprising, news is that its budget deficit is improving. Last year its deficit was 5.6 per cent of GDP. This year it seems to be on course for around 4.8 per cent.

This is surprising for two reasons. Firstly, Belgium doesn’t have a government, not as such. Secondly, the reason why she has no government is that the country is pretty much split down the middle between those who do and don’t want to see austerity.

Belgium’s problems go beyond that, however.

Exports are important to Belgium, very important, making up 80 per cent of GDP. But in recent years she has seen a significant loss of competitiveness. According to a report from Capital Economics earlier in the year: “Its real effective exchange rate has risen more sharply than those of most other economies [that’s Eurozone] with the exception of Italy.”

Belgian banks are also exceptionally vulnerable. The government bailed out the banks Dexia, Fortis and KBC during the banking crisis, but ever since then the banks have limped forward and still seem to have weak balance sheets.
Belgium’s banks also seem to have heavy exposure to the so-called ‘PIIGS’ and Eastern Europe.

At the end of 2008, OECD figures suggested that Belgian house prices were among the most overvalued in Europe – for more, see yesterday’s piece: Portugal and Ireland – debts, wages and house prices: how do they really stand?

But Belgium scores in one important respect. It seems the Belgian people are a frugal lot, and household debt in Belgium is quite modest. In fact, Belgium and Italy are the two countries with the lowest level of household debt.