Against a backdrop of nationwide strikes, the government of embattled prime minister Silvio Berlusconi is scrambling to secure parliamentary backing for a revised reform package, new tax rises and spending cuts. The 20% VAT bracket will be raised to 21% and a special 3% levy will be imposed on incomes of more than €500,000 (£439,000). Berlusconi said ministers would approve a new «golden rule» in the constitution on balanced budgets and simplify local government.
A strike in Rome on Tuesday showed the strength of feeling that richer Italians had escaped tax rises and spending cuts. Analysts believe Italy could be the next Greece. Economist David Mackie at JP Morgan said: «Once you say to Italy, we will not allow you to fail, they then have the upper hand. There has been a moral hazard issue with Greece for some time. Now we have one in Italy, too.»
Despite its stellar status, Germany is far from all-conquering. The Dax share index has lost 29% since the beginning of July – significantly worse than London’s FTSE 100 – while business confidence is tumbling at the fastest rate since the collapse of Lehman Brothers. New data showed a sharper than expected fall in industrial orders in July, especially from beyond the eurozone. German taxpayers are becoming increasingly sceptical about efforts to help eurozone strugglers such as Greece. That in turn has put domestic pressure on the chancellor, Angela Merkel, whose coalition government has suffered a string of setbacks this year.
Another day, another denial from Spain that it has come close to requiring a bailout. Spain’s finance minister, Elena Salgado, rejected suggestions on Tuesdaythat the country nearly called in the International Monetary Fund last month, after a Spanish union leader reported that prime minister José Luis Rodríguez Zapatero had told union and business leaders he had seen «the edge of the abyss, in the form of a bailout for the Spanish economy». Whatever the truth, Spain is in deep trouble. To cut its borrowing requirement, the country has just started a privatisation programme, which includes selling a 30% stake in the national lottery, which it hopes will raise €9bn (£7.9bn), and part of the state airport authority.
The latest data has caused economists to fret that Spain may be heading towards recession.
Under heavy fire from German and Finnish politicians, George Papandreou‘s left-of-centre government is facing accusations of backsliding. Having committed itself to huge cuts in state spending and a €50bn (£44bn) privatisation programme to gain a second EU bailout package, the fear around Europe and the US is that Papandreou cannot force through the reforms needed to make the cuts work. The interest rate for the government to borrow for two years is now more than 50%, showing investors do not want to go near the Greek economy. Officials on Tuesday denied newspaper claims they had asked for faster bailout payments to fill the gap left by lower taxes and higher spending.
There are plenty of economists who put Portugal and Greece in the same boat. Moody’s, the ratings agency, says Lisbon’s attempts to cut state budgets are failing and it is only a matter of time before officials seek a second Brussels bailout – the first entailed €80bn (£70bn) of loans. Prime minister Pedro Passos Coelho says more cuts will do the trick, despite expecting the economy to contract this year and next.
Finance minister Vitor Gaspar says the Portuguese should expect to pay more taxes next year, including higher VAT and increases for higher earners and companies making big profits. Protests are likely as unemployment is set to head toward a peak of 13.2% next year.
Chancellor George Osborne is to downgrade his growth forecasts for the UK after a series of gloomy business surveys and sharply declining consumer confidence. Stock markets were spooked on Monday when a survey of the vital services sector was the worst for a decade. Services make up 75% of economic activity. A similar survey of manufacturing last week was dire. Constr-uction, once a booming industry, has shrivelled. A double dip recession beckons and some economists believe the economy may already be contracting. The chancellor is sticking to his austerity plan and hoping the Bank of England governor, Mervyn King, can ease the pain by maintaining low interest rates.
The economy has appeared largely immune from the effects of the current crisis and grew robustly in the second quarter. GDP climbed by 2.3% from 2010 but the latest quarterly increase – 0.4% – was the lowest since 2009, causing economists to worry that the strength of the Swiss franc would put a further brake on expansion this year and into 2012. That is why the Swiss National Bank in effect devalued its currency on Tuesday. The Swiss franc, seen as a safe heaven, had moved close to parity with the euro but its strength has made the country’s exports much more expensive and harmed its tourism industry. Swiss residents have been crossing into Germany to shop.
Even so, economists warned that the powers of central bankers can be very shortlived when it comes to currencies
Ireland is in the depths of the worst recession in its history, but there are signs it may have turned the corner. Ireland was bailed out by the IMF with €85bn last year, but some economists believe the austerity measures introduced by the Dublin government are now paying off.
Borrowing costs have fallen and GDP growth is forecast at 1.8% this year. Still, while Ireland is banking on exports to return it to economic growth this year, it also desperately needs to halt the decline in consumer spending in order to meet growth targets crucial to dealing with a mounting debt pile. December’s budget already promises to cut spending and raise taxes by at least €3.6bn.