PIIGS' Relative GDP - A Ballpark Risk Assessment

by: David White

Currently there is a lot of debate about whether Greece will default eventually or not. There is worry that such a default could cause a credit contagion that would result in a domino effect of toppling economies. You can debate whether or not this will happen. Perhaps defaults can be avoided? The EU and IMF are trying hard to accomplish this. If they do, it will only be by means of huge cuts to sovereign budgets in order to cut budget deficits. The latest Greek cuts requested were over 10% of its GDP, and that is not even considering the precious cuts it made. Ballpark, the total cuts may come to 20% to 25% of Greece’s GDP. You simply can’t do this without shrinking the Greek GDP considerably. This means recession for Greece, if not depression. The other PIIGS have to make similar cuts, if perhaps not quite that big. Whether they default or not, the cuts to avoid default will be severe. These countries seem likely to all end in recession if not depression soon.

To get a good idea of what this will mean to Europe overall, it is instructive to compare the various GDPs of the major EU players. The chart below shows the GDPs of the PIIGS, plus France and Germany.

click to enlarge

One can see that the GDPs of France and Germany are bigger than those of the biggest PIIGS, Italy and Spain. However, they are not much bigger. If those countries' GDPs shrink considerably, the economies of Germany and France will be hurt considerably. If Germany, France, and the rest of the EU attempt to bailout Italy and Spain at some later date, it will be hard to do without putting their own economies in serious jeopardy.

Europe is between a rock and a hard place currently. It could avoid a major economic disaster if it is both careful and lucky. However, a double dip recession seems inescapable, and that’s the least bad result. Further, the ash cloud problem will hurt tourism, which accounts for perhaps 10% of EU GDP. Events are conspiring against Europe. Plan your investments accordingly. This situation is not one to scoff at.

Disclosure: No positions at this time.