Reflections on a month in Europe: economic pain not over

Posted on 06 September 2009 with no comments from readers

Just back in Dubai from a month in Europe – more specifically, England, Scotland, Ireland and France – and time to take stock of the economic outlook in these countries as I saw it with my own eyes.

At first glance you would hardly recognize the worst recession since the Second World War. There are no protests in the street, though perhaps a few more beggars. You can see a few empty shops and apartments but only by close inspection. People on the whole seem well dressed and far from destitute.

But talking to people the first thing that you realize is that debt is at record levels. Individuals are grateful for low mortgage rates because otherwise they could not afford their homes, which are still mostly falling in value. Companies and especially property developers and governments are deep in debt.

Ireland is the debt champion at 350 per cent of GDP and estimates of bad debts left by the property crash are from $70-90 billion. Then again the personal and business outlook is not good either.

Tourism Ireland

Take Irish tourism: on one estimate I was given tourism arrivals are down around 20 per cent and revenues by 50 per cent as visitors are spending far less. You can see hotels struggling for business in the peak season, and the five-star hotels are losing money heavily from their published accounts.

This is debt deflation. Large amounts of debt require repayments and servicing and that further depresses activity in the real economy, and that lowers prices and makes it even harder to handle the debt. At the same time Ireland is locked in the euro-zone and so can not devalue its currency, which the UK has down with some success.

Not that Britain is doing that well with the IMF saying the UK will be last major economy out of recession this year, and with an estimated fall in GDP of almost five per cent – the worst decline since the Second World War. Why is this not more evident?

I suppose it has to be the ultra-low interest rates and government printing of money, both policies deferring the inevitable pain, as if the current situation was not already bad enough. The UK definitely still has another day of reckoning coming, and so does Ireland as it gets to grips with its huge debts; that will mean lower house prices, higher unemployment, higher taxes and public spending cuts.

La vie en France

France seemed to be in a less parlous state. Indeed, there has been a very modest exit from recession in the third quarter, although nothing like enough to compensate for the damage done over the past year. A state-dominated economy has its advantages in a recession and much as in the 1970s the French economy seems enviously well able to cope.

That said France is the biggest tourist attraction in Europe and revenues must also be down sharply. Many restaurants seemed empty and the queue for the Louvre Museum almost non-existent at peak times. We found Napoleon’s home tourist-free. Even the restaurant up the Eiffel Tower could have taken diners on the day, which we were told would not be possible.

Taxi driver distress

The Parisian taxi driver to the airport seemed almost embarrassingly pleased to have secured his fare, and thanked a fellow driver for passing us on with a display that surely indicated that business was not so good. It can not be good for France if the public sector is still spending while the private economy is shrinking.

Indeed, what I really felt about the north-western corner of Europe this summer was a sense of unreality, of people sitting on a time-bomb. Governments have taken some pretty desperate (and expensive) measures to keep the show on the road but this looks a temporary stop gap, and there is absolutely no sign of a follow through or recovery in the private economy.

How can there be when debts remain so big and the consumer is under pressure and so scared that they are spending and not saving? The answer to this conundrum must be that the economic crash predicted by the stock market last autumn has been merely postponed and not avoided.

The so-called recovery is essentially a con-trick by an unholy alliance of bankers and politicians who are still going to have to face up to a very different reality. But they show very little sign of knowing what lies ahead or willingness to take tough action.