Skip to main content

The Globe and Mail

This year's predictions for Europe? Outlook not good

The prediction addiction has not escaped your European business and economics correspondent. The new year is but a week old and some patterns are already emerging. It looks like energy prices, restructurings of both the sovereign and corporate variety and social unrest will define 2012, potentially making it as grim as 2011, in spite of the nascent American recovery. Herewith some ground-level notes from the slow-motion-suicide that is Europe.

Misguided flight to safety

Last year, the bonds of Germany, Britain, Japan and the United States defined sovereign debt safety. As the European debt crisis shredded the bonds of Italy, Spain and some of their small, debt-trashed neighbours, the bonds of the biggies rose, sending their yields down to 2 per cent, give or take a couple of dozen basis points (100 basis points equals one percentage point).

Story continues below advertisement

Don't count on the safety of the "safe" for much longer. How much longer can German yields stay below 2 per cent? Indeed, Germany is Europe's paymaster and the prime sponsor of the bailouts of Greece, Ireland and Portugal. More cheque-writing seems all but certain as Italy, the euro zone's third-biggest economy, sees its bond yields climb back to the wholly unsustainable 7-per-cent level. If the euro zone is to stay intact, it is ultimately Germany that will have to pay for it, sending German bond investors fleeing.

If Europe breaks up – a scenario no longer unthinkable – the return of the deutschmark could have dire effects on the German economy. The mark would soar, damaging the formidable German export machine, with a predictable reaction from bond investors. Meanwhile, Britain is slipping back into recession and its budget deficit, thanks to growth-killing austerity programs and the euro zone's headfirst dive into the recession pool, remains uncomfortably fat. Watch its bonds lose their appeal, too.

Oil's slippery slope, but which way?

With the United States, Israel and other usual suspects putting pressure on oil importers – that is, most of the countries on the planet – to reduce their imports from Iran, and Iran retaliating by threatening to block the Strait of Hormuz, through which one-third of the sea-borne oil trade passes, small wonder that prices have been surging. On Friday, Brent (North Sea) crude reached $113 (U.S.) a barrel and plenty of forecasts are bullish. Barclays Capital expects oil to reach $118 by the second quarter.

I prefer Byron Wien's forecast. The Blackstone vice-chairman thinks the price will plunge to $85 or so as American shale-oil output climbs, the spigots are reopened in the post-war Libyan fields and economic growth sinks, notably in Europe. Of course, falling oil prices would be a blessing for the recession-stricken debt victims, such as Italy, but exporting countries would suffer.

Which brings us to Russia. Oil is both Russia's saviour and nemesis. Simply put, when prices are high, Russia thrives; when they plunge, Russia, whose economy is overly dependent on energy, plunges with it. In 1998, when prices dipped below $11 a barrel, Russia defaulted on its debt. There is no way oil will get that low again, but a big fall could unleash economic and social hell. Various analysts estimate that the Kremlin's "break-even" oil price – the price at which its budget balances – is about $100 a barrel. Citibank has said that every $10 decline in the price of oil reduces the Kremlin's revenues by an astounding $20-billion. Falling oil prices could wreck Russia's social compact – the gutting of democracy made more bearable by rising living standards. Anti-Vladimir Putin protests have broken out in Moscow and other cities. More will come if the economy deteriorates. The obscenely rich oligarchs had better watch their backs.

Restructurings galore

Story continues below advertisement

Low growth and high debt do not mix well and Europe has too much of both. Almost every economic indicator in the euro zone – employment data, retail sales, confidence indicators – screams recession. Italy is already in the tank and Britain, Spain and France are not far behind. Even Germany, whose factory orders fell 4.8 per cent in November, may not avoid the dreaded double dip.

The recession could be murderous for companies with rising debt and flagging sales. Note that Switzerland's Petroplus, Europe's biggest independent oil refiner, is quietly going out of business. It is the victim of too much debt, sluggish demand in moribund Europe and a frozen $1-billion credit line. Three of its five European refineries are being shut down.

The horror show is hitting other industries with weak balance sheets and sales. In the car industry, France's PSA Peugeot Citroën, the European industry's second-biggest player, looks especially vulnerable. Its car sales fell 13 per cent in November and things could get worse because most of its sales are in the one market – Europe – which is going into reverse at an alarming speed. About 6,000 European employees are being eliminated and the company tossed out a few of its top executives a few days ago.

In Europe, Fiat, the controlling shareholder of Chrysler, is not in much better shape. French politicians will not let Peugeot run into the ditch, so state aid from a country that can ill afford it seems probable. Sweden's Saab recently went bankrupt. Other companies in other industries face debt restructurings or going out of business. This year is bound to be grim for Europe's corporate weaklings as the recession bites into their balance sheets. But healthy, cash-rich companies will have a field day.

Report an error Licensing Options
About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Combined Shape Created with Sketch.

Globe Newsletters

Get a summary of news of the day

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at privacy@globeandmail.com.