Europe is dead

Europe is dead.

Or at any rate, the notion of a unified Europe is now in serious decline politically and economically.

Sovereign debt, bail-outs, and austerity measures have featured in the news for many months now but it is only very recently that some of the less obvious implications of these events have been discussed.

Let’s take the example of Portugal, the most recent European economy to come unstuck.

Like most countries, Portugal relies on borrowing and issuing bonds to keep the wheels of its domestic economy turning.

In April, Portugal has €5 billion of repayments to honour.  There’s a similar amount due to be repaid in a few months’ time.

To meet those commitments, particularly the second tranche, Portugal will – in all likelihood – need to borrow.  But as an economy in trouble, it is penalised by having higher rates of interest applied to its bonds.  IE: the markets want a higher rate of return in exchange for what is considered a higher risk loan.

That rate of interest is in the region of 8% over a period of 10 or so years.

The Portuguese economy will not grow at anything like that rate. Meaning that meeting its repayment responsibilities in the future will become increasingly harder.  Which in turn has to increase the likelihood of Portugal defaulting on its debts.

No problem, some will say… there are bail-out options.

Yes, there are. And they are mostly funded by Germany, the Netherlands and to a lesser extent France and Finland.

There is a growing sense of dissatisfaction within these countries, especially Germany, that the domestic tax-payer is bailing out their lazy southern European neighbours. Politically-speaking, this is an unsustainable situation and unless it has been dealt with before then, it will become a major issue at the next German general election.

There is a sense among some economists that as long as this situation is confined to Ireland, Greece and Portugal (smaller nations) the rest of Europe needn’t worry.

But should Spain or Italy, for example, succumb to the financial fallout the consequences would be harder to live with for Europe as a whole and could herald the end of the Euro.

No one seems to have any answers as to how any of this could be avoided or how Europe gets out of this situation. Ignoring it, however, won’t make it go away.