Greece was in the eye of the storm before the summer and its sovereign debt crisis remains the worst in the eurozone – it is paying a far higher premium than Ireland for its foreign debt. However, despite fears of huge public resistance, the adjustment programme agreed as part of the EU-IMF deal is said to be going well. Under the plan, the Socialist government has committed to reducing the budget deficit from 13.6% of GDP in 2009 to 8.1% this year, 7.6% in 2011 and 2.6% in 2014.
Austerity measures to achieve this include a public sector pay freeze until 2014. Christmas, Easter and summer holiday bonuses are abolished for civil servants earning above €3,000 a month and are capped at €1,000 for those earning less. There has also been a 20% cut in public sector allowances, which account for a significant part of civil servants' overall income. The main vat rate has been increased by four percentage points from 19% to 23%, while excise taxes on the 'old reliables' – petrol, cigarettes and alcohol – have been increased by a further 10%. Other measures include a one-off tax on very profitable companies and more property taxes.
Pensions, according to the government, will be frozen this year and for the next two years, while the statutory retirement age for women will be raised by five years to 65.
Unlike in Ireland, the Greek banks weren't a major factor in the crisis, although there were fears they would become victims of the debt crisis. But the government is urging them to consolidate. The longer term challenge for the Greek government will be to implement the necessary structural reforms to the economy.
The Spanish government initially opted for a fiscal stimulus but the gravity of its budgetary and sovereign debt crisis meant this was replaced by an austerity plan – following pressure from no less a figure than Barack Obama who urged the Spanish prime minister in a phone call to take "resolute action". The government's plan is to slash the budget deficit from 11.2% of GDP in 2009 to 6% in 2011 and 3% in 2013. Spending cuts of €15bn have been penciled in for this year and next – in per capita terms much less than are being implemented in Ireland. Civil service salaries are being cut 5% this year and frozen in 2011. There are also plans to increase the retirement age and slim down the hugely generous welfare system, as well as cutting €6bn out of the public investment programme.
Spain's unemployment rate is a staggering 20%, with over 40% of young people looking for work. It has also endured a serious property bubble with one million new homes currently unsold. Spain's main commercial banks are in a good state but the property crisis has had a serious impact on the regional not-for-profit savings banks called cajas, which account for the lion's share of the €445bn of property debt accumulated during the credit boom. One caja in Cordoba, controlled by the Catholic church, lost €596m last year, most of it on holiday homes in the Costa del Sol. The government has brought forward a plan to shrink the number of cajas from 45 to 15 and has recapitalised the banks to the tune of €16bn – a much more manageable figure than the Irish government has had to invest. Like Greece – and unlike Ireland – there is also considerable work to be done in restructuring the economy.
The eurozone's poorest country is implementing a plan – agreed between the government and the opposition – to reduce its budget deficit from 9% in 2009 to 7.3% of GDP this year and 4.6% in 2011. Measures include a 5% pay cut for senior public sector staff and politicians and increases in vat, income tax and profits tax by between 1% and 2.5%. Portugal is having to pay the same kind of premium as the Irish state to borrow money internationally and is seen as the eurozone's weakest link after Greece and Ireland. The markets are concerned by its high level of indebtedness – combined public sector and private debt is said to add up to over 200% of GDP – and its slow record of economic growth over the last decade. In 2010, the economy is expected to shrink by 3.3%. However, its banking system is considerably healthier than Ireland's, although the government also introduced a bank guarantee scheme. It successfully raised €1bn in debt last week on the foreign markets but the average interest yield on the longer term bonds was close to 6% – over half a percent higher than a month earlier.
Still the stand-out example of the horror show that has been the global financial and economic crisis. Icelandic sovereign debt has merely junk-bond status and the latest economic statistics show that the economy is continuing to contract at an alarming rate. With three of its main banks and its financial system collapsing, Iceland became a ward of the IMF, relying on a $4.6bn IMF-led loan to help avert a default, while its currency was heavily devalued.
Claims in some quarters that this approach should form a template for Ireland were seriously undermined by recent second-quarter statistics showing the economy declined by an unprecedented 3.3% in just three months, with the economy smaller by 8.4% on a year earlier. There had been hopes before this that the economy had turned the corner, although, on a brighter note, growth of 3.9% is forecast for next year. As many as 40% of homeowners are facing technical insolvency and, although interest rates have fallen from the massively high rates of late 2008 (when the government was attempting to protect the value of the currency), at 7% they are still considerably higher than the Eurozone Iceland is now endeavouring to join.
The crisis has brought about a change of government and a referendum on a proposal to repay a €3.8bn loan from the UK and Dutch governments to cover deposit insurance obligations arising out of the collapse of one of the main Icelandic banks' internet operations that was operating in those two countries. Despite warnings that the defeat of the referendum would limit the state's ability to raise loans from the IMF or join the EU, the referendum was resoundingly defeated with 90%-plus of voters rejecting it. Fresh negotiations are ongoing with a view to coming up with a new plan.
The Italians have announced deficit cuts of €25bn over two years – including wage cuts for politicians – with public sector workers facing a three-year freeze on wages.