Can Europe handle the next crisis – are there tools to deal with the looming crisis


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Friday, 05 August 2011
Following the market events on ‘red Thursday’, fingers are being pointed more to Europe's major problems than the USA. In this way, few investors believe that European continent is capable of handling the new debt crisis, especially now as the European economies falter.

Europe has been described as followers of world trend – meaning they don’t create but wait for others – America to create for them. Do we have the real tools here to deal with the economic crisis on our door steps or shall we be waiting for China or the USA to do something for us?

When the financial crisis escalated in 2008, it was caused by distrust of the world's payment systems that had become compact. Few had anticipated that a major bank, Lehman Brothers was allowed to go bankrupt and no one knew who owned the complex securities that are constructed from bad U.S. mortgages.

The result was a halt in order bookings for many Swedish companies, which quickly led to the termination of thousand employees and reported large losses, particularly during the 2009s.

Almost three years later, many billions were pumped into banks; new rules were put in place or to give confidence in the payment system, with the exception of several southern European banks.
Swedish exports companies thereafter started reporting long-term profit gain and started recruit again.

The big concern has been on the stock exchanges in recent times driven by those who buy and sell securities, such as large pension funds. They started to deeply distrust politicians and wondered is the politicians could overcome the debt crisis.

Along with growing evidence that the economic upswing is broken, it has led investors to flee the stock market to invest in safer investment than shares. Investors believe that corporate profits are on the wane in the future.

One of the most damming factor affecting western companies today is their loss of the production base in favour of China. Western leader sat and watch capital transferred from the thriving western economies to a Chinese perceived low cost manufacturing base. This made the west, Europe and the USA to loose their manufacturing base and with most of the jobs moving abroad, no body to earn incomes and buy products. Corporations could make lots of money because they produce in cheap China and sell either at home of in other markets.

Now the West relies on Chinese and Asia to produce and they to buy …where is the money coming from? Just asked!  We now have the Chinese taking over Volvo Cars Corporation and Saab in running all over China seeking funding – unheard of 5 years ago while in Sweden no body cares about Saab. The government instead of seeking ways of making the company stand (just as Obama did with GM though his opponents in the west still see him as a very weak leader), are instead preparing to bury the company and start tossing its worker round.

In the UK for example, too much was placed on two sectors banking and real estate. Credit card debts soared and repossession became the order of the say. Academics and high sounding analysts said then that the UK economy was great and that productivity then was better that that of the Germans though we just saw MG Rover collapsed.

This followed wave of British firms moving to Asia or China. Such a thing is also seen happening in Sweden where domestic debts is now very high   and house prices are unapproachable in Sweden.

The difference here is that at least in Sweden there is the realism of discipline.  Unlike the UK, the government here seem to have listen to the calls of various analysts and have put a cap on borrowing and interest rates rise have just dampen the sector. But the question is that if the crisis leads to mass layoffs, persistent higher interest rates and inflation, how will home owners pay their mortgages in Sweden?
The risk right now is rather that the turmoil should not spreads into companies' daily operations, that something happens that they dare not trust their order books, refrain from buying inputs and postpone hiring. Such decisions will definitely affect the strong Swedish economy. Let’s watch and wait.
By Team

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