The Real Debt Crisis in Europe - Read On

SO MUCH has been written about the debt crisis in Europe that it can send your head into a confusing spin. The easiest thing is to just tune out.
But don't. Europe is on the brink of tearing itself apart and the ripple effect around the world, and on your life, could be significant.
Spend a week in Italy, Greece and Germany, and you will get a sense of how serious it is. A dismantling of the European Union could send the region into a serious recession.
For Australians, a serious European recession could see our commodity prices fall; spark a global banking crisis that pushes up interest rates and makes credit harder to get; and cause share markets to fall, which affects our superannuation returns and hits consumer and business confidence.
To understand how this could have happened to Europe, Italy and Greece are great case studies. They've been brought to their knees by widespread tax evasion, rampant corruption and a lack of competition. Here's a simple guide to what's happening in Italy and Greece.
This is Greece:
* Economy contracted 5.2 per cent in past year.
* Government debt is 145 per cent of GDP (Italy is 115 per cent, Ireland 95 per cent).
* Unemployment to 18.75 per cent but closer to 25 per cent because 115-a-week benefits stop after a year.
* Budget deficit 15.4 per cent of GDP, well above eurozone limit of 3 per cent.
* Public service employs 20 per cent of the population.
What has dragged Greece to its knees?
* Tax evasion amounts to 22 billion ($29 billion) a year or 10 per cent of GDP.
* Corruption is worth 20 billion a year or 8 per cent of GDP.
* Black economy accounts for 25 per cent of GDP.
* Protected industries mean no competition. For example, there hasn't been a new trucking licence issued since 1970.
* The big interest bill on government debt is killing the economy.
How are they fixing it?
* Social security payments to be slashed by 5 billion over four years.
* Public service wages cut by 20 per cent.
* Pensions above 1000 a month cut by 20 per cent.
* Retirement age raised to 65. It's currently 50 years for public servants.
* Deregulate industry to promote competition.
The key to all of this is convincing Greeks to pay their fair share of tax. Would you believe 900,000 Greek people or businesses owe 41.1 billion in back taxes and 14,700 of them owe 3.7 billion, or an average 150,000 each?
They have a tax on swimming pools in Greece and in one of the rich Athens suburbs only 324 households admitted to having a pool and paying the tax. So the Finance Ministry sent up a helicopter and photographed 16,974 pools in that area. One of the hottest items for sale in Athens is camouflage pool covers.
A good reflection of how nervous Greeks are about the future of the country is 9000 people sent 4.9 billion overseas last year. But 5000 of those people declared a taxable income of under 20,000 a year.
This is Italy:
* Eighth largest economy in world and fourth largest economy in Europe.
* Government debt of $2.6 trillion, which is 120 per cent of GDP.
* French banks have $400 billion exposure to Italian bonds, while German banks have $150 billion.
* European Stability Fund to save debt-ridden countries is $1.3 trillion, which is not enough to save Italy.
* Nightmare to do business. Italy is ranked 87th in an Ease of Doing Business index, which puts it behind Sudan.
* Lots of corruption. It's ranked 67th in the Corruption Perceptions Index, behind Rwanda and several other African countries.
* Over past 10 years, economic growth has gone backwards. Italy's economic growth over the past 10 years is ranked 179th in world, behind Zimbabwe.
Italian austerity measures:
* Public servant wage freeze until 2014 and pubic service headcount slashed. For every five people who leave, they'll only be replaced by one.
* Freezing aged pension and making it tougher to get.
* Increase healthcare fees and cut family tax benefits.
* Increase value-added tax from 20 per cent to 21 per cent.
* Tax surcharge on high-income earners.
* Limit cash transactions to under 2500.
* Crackdown on black economy and tax evasion.
* Cut government red tape.
* Deregulation of labour laws.
* Implement privatisation of government enterprises.
What will save Italy?
* Government debt high but private debt low.
* It makes a budget surplus before interest. The interest on government debt is the killer.
* Has a strong industrial base.
* Italians are traditionally good savers.
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DEBT CRISIS

WHILE the European debt crisis seems to be getting worse, one of the bright spots is the encouraging signs coming out of the US.
Stronger retail sales figures, an upturn in the jobs market and improving economic growth could see the US recover at just the right time to offset any European downturn.
Some forecasters are saying the US economy is improving faster than they expected, which will hopefully improve consumer confidence and bring stability to the ailing property market.
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BANK CRUNCH

ONE of the consequences of an ailing Europe is the pressure it could put on European banks.
With the amount they have invested in European government bonds, any defaults will trigger big losses.Big banks making big investment losses means they will go into the bunker and not lend us as much.
So credit will be harder to get and it will cost more if you're successful. Interest rates will rise.
So it might be worthwhile cherishing those lines of credit that you already have approved. Even if you pay down the line of credit, think of keeping it open in case you need it later.
Some analysts are even saying it's better to apply for a line of credit now while it's still available and just have it sitting there unused as a safeguard.

thanks to news.com.au