Photo: AP/Michael Probst
Here’s a nice, tidy roundup of some medium-term challenges facing Europe courtesy of Credit Suisse’s Andrew Garthwaite:The key problems are: (a) without a weaker euro, we estimate a 5% to 13% wage decline is required in the periphery to regain competitiveness (and with wages being half of GDP, growth will suffer); (b) private sector deleveraging, with the exception of Ireland, has so far been limited; (c) adjusting for excess private sector leverage, Portugal looks insolvent with government debt-to-GDP of c140% by 2014, Spain’s government debt could rise to c100% of GDP and Greece, even post PSI, will be required to run a primary budget surplus of 8% of GDP to stabilise government debt to GDP; and (d) the overvaluation of the euro. The good news is that the mutualisation of debt is progressing (via the LTRO and potentially the ESM) as is the ring-fence for the solvent. We could see some light at the end of the tunnel in Europe if the euro were to weaken sharply. At Eu/$1.10, GDP growth would be boosted by close to 1 ppt and only negligible deflation would be required in the periphery.