What will be the real impact of the meltdown in Europe?

by Frank 8. December 2011 13:43

Banner headline today from Australian Financial Publications, “Spanish and Italian bond yields rose overnight after it was revealed that Italian banks had to borrow €153bn in emergency liquidity from the ECB in November, representing a 38 per cent rise on October and a near-quadrupling of requirements since June”.

“ECB may dig deeper into toolbox as leaders seek fiscal union” says new headline from Bloomberg.

“S&P warns about lowering credit rating amid Euro Zone Crisis” reports the French Tribune.

Listening to a variety of financial news channels and reading financial newsletters and publications only serves to depress us about the future of the Euro zone and Europe in general.

No one really expects Europe to avoid a major recession and no one really expects Greece or Ireland or Portugal or Spain to ever be able to pay back all the money they owe.

The more pessimistic of the experts warn of five to ten years of recession or deflation/stagnation and long term unemployment rates exceeding twenty-percent. The European welfare state is in its death throes but no one really wants to fess up how bad it really is. Germany is mad that those lazy southern Europeans are messing with its prosperity and France is mad because those same southern Europeans are screwing around with the new French empire; France being, as everyone knows, the heart and soul of Europe.

As Europe is the world’s biggest economy, bigger even than the USA, what does the current situation and even grimmer forecast mean for the rest of us who do not live in Europe? Will we still be able to buy a BMW, French wine and a Spanish sausage? Will they cost more or less? Will the boatloads of Asian refugees coming to Australia be replaced by fishing boats full of Spaniards, Portuguese and Greeks?

I have already heard from my friends, relatives and business associates who have visited Europe recently that it has become outrageously expensive and more than one of them referred to places like Greece and Ireland as “rip-offs”. I recently read that 14,000 fewer young Australians were able to enjoy a working holiday in the UK (long an Australian tradition for adventurous young Australians) because there simply isn’t any work, even for eager, hard-working Aussie backpackers. So where do these 14,000 young people now go? Do they come back to Australia and exacerbate our unemployment problem? Do they go the places like Bali and get arrested for smoking funny cigarettes?

Do tourists stop going to Europe because all the new and higher taxes and ‘opportunistic’ additional charges have made it just too unpleasant? If so, what happens to all the businesses in Europe that depend on tourism? Does it mean yet more European boat people for Australia? Will they all be happy to move to the far northern deserts of Western Australia eating dust and digging up iron ore for export to China? But, what if the pundits are right and China’s economy is slowing down and it stops buying shiploads of iron ore every day? Then where do our new immigrants go and where do they find work?

It is all a conundrum and its makes my head ache. It would help a lot if the leaders in Europe would actually start trusting each other and telling the truth but you know what they say about politicians and lying, “You can always tell when a politician is lying because his/her lips are moving.” All we know is that it is going to get a lot worse before it gets better.

So we lucky Australians (and maybe a few lucky New Zealanders) need to start thinking ahead about how all of this will impact on our cosy lifestyles. We know we have the world’s greatest treasurer (he told us so) but he is a politician and I have already covered the trustworthiness of politicians in the previous paragraph.

It is not like we have somewhere better to go to. Right now Australia is the healthiest place to live by a proverbial mile but that also means there is no alternative, no escape hatch if the economy here starts to deteriorate. Greeks from Melbourne (once the world’s second biggest Greek city) certainly won’t be heading back to Greece any time soon and POME migrants like me (English to the uninitiated) sure as hell won’t be heading back to old Blighty.

With the exception of mining, agriculture and farming most Australian businesses like mine rely on the Australian economy. I own a software company and whereas we do sell in the UK, the USA and Canada most of our business is here in Australia. In the past when the Australian economy slowed down we could target overseas markets but that really isn’t an option now with most of the rest of the world in financial meltdown and the real costs of exporting higher than ever.

The bottom line is that those awful Europeans are going to continue to actually do nothing to solve the debt problems of European nations and their leaders will continue to obfuscate and pontificate until the house falls down. Unfortunately, our house is linked to their house so when Europe falls our economy will also be hard hit as the inevitable fall off in demand for Chines products from the world’s largest economy exacerbates the Chines slowdown and blows a hole in our mining boom. There go those billions of dollars the government is relying on from the new super profits mining tax.

Of course I could be wrong and I bet most of you hope that I am. I could have seriously misjudged the European leaders and a European boom could be just around the corner along with a surge in Chinese and Indian demand for our mining and agricultural products. There is also a chance I could wake up tomorrow younger, taller, better looking and smarter but to my mind both are pretty unlikely scenarios.

As we already live in the best country in the world, there isn’t a lot we can do other than work harder, work smarter, support Australian business (please, please stop outsourcing our jobs) and look after our family and friends. It is going to be a long hard haul but I believe in Australia and Australians so I am confident we will come out the other side a stronger and better country. In a funny way, this is our chance to grow in stature and become a much more important and powerful country. Let’s hope our leaders are up to the task.

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