Investment Research General Market Conditions
1 November 2011
Euro Area Fact Book
The euro area came into existence on 1 January 1999 when the euro was officially
Key facts
launched in 11 EU member states. The euro area now comprises 17 member states and
accounts for almost 15% of world GDP – second only to the United States of America. • 17 member states
Prior to the launch of the euro many critics noted that a monetary union would not work • Population: 332 million ( 2010).
without a fiscal union. The Stability and Growth Pact, which among other things
stipulates that government debt should be below 60% of GDP and that the government • GDP: EUR9.2trn (14.6% of World
deficit should be below 3% of GDP, was supposed to work as a safeguard to ensure that GDP)
member states implemented prudent fiscal policies. However, fiscal slippage did take • GDP per capita: EUR27,700.
place in a number of countries including France and Germany, but the Council then failed
to apply sanctions. Following the financial crisis, which caused a substantial deterioration • Euro Group President: Jean
in government budgets, the euro area as a whole now breaches both the government debt Claude Juncker
and deficit limit. • ECB President: Mario Draghi
The financial crisis became a debt crisis when revisions of Greek budget data in the
autumn of 2009 showed that the fiscal situation was substantially worse than previously
thought. Greece was then granted a EUR110bn EU/IMF package in May 2010. In the Economic characteristics
meantime the debt crisis had become contagious and in an attempt to stop the crisis the
• Economic and monetary union
EU and IMF on 9 May 2010 presented rescue funds totalling EUR750bn and the ECB
announced that it would begin to purchase government bonds in the secondary market. • Second highest GDP in the world
Ireland, which had a government budget deficit of 32% of GDP in 2010 caused by one- • Three member states have an
off expenditures to bank rescues, was the first country to receive a EUR85bn rescue EU/IMF programme
package from the new funds in November 2010. Portugal received a EUR78bn rescue
package in May 2011 and Greece was committed EUR109bn in a second rescue package • Large public sector
in July 2011. Substantial fiscal tightening in Greece and Ireland has resulted in a sharp • Large government debt and
reduction in budget deficits, but has also caused severe recessions. deficit
At the Euro Summit on 26 October 2011, leaders agreed on a comprehensive package to
• High unemployment rate
combat the debt crisis. The summit statement includes agreements on leveraging the
European rescue fund (see below), recapitalising banks, a 50% voluntary debt reduction
for private investors in Greek government debt and intentions to set up a public guarantee
scheme to support banks’ access to funding.
The European Financial Stability Facility (EFSF) was created as part of the deal
announced on 9 May 2010. At the EU summit on 21 July 2011, it was agreed to enhance
the capabilities of the EFSF by increasing its actual lending capacity to EUR440bn and
allowing it to purchase government bonds in the secondary market (based on ECB
Senior Economist
analysis) and for EFSF funds to be used for recapitalisation of banks. At the Euro Summit Frank Øland Hansen
in October 2011 two models for leveraging the EFSF were agreed: A first loss insurance +45 4512 8526
franh@danskebank.dk
model and setting up Special Purpose Vehicles to attract investors. The two models may
increase the EFSF remaining firepower to around EUR1000bn. Assistant Analyst
Mikael Olai Milhøj
+45 4512 8229
milh@danskebank.dk
Important certifications and disclosures are contained from page 11.
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The European Financial Stability Mechanism (EFSM), which has EUR60bn administered
by the European Commission, also contributes to the rescue packages as does the IMF,
which has committed EUR250bn. The European Stability Mechanism (ESM), which will
be a permanent international institution located in Luxembourg, will take over the roles of
the EFSF and EFSM from mid-2013 at the latest.
The debt crisis has put substantial pressure on the financial system within the euro area.
EU wide bank stress tests published in October 2009 and in July 2010 were widely
criticised for not taking the potential consequences of the debt crisis fully into account.
Indeed the stress tests failed to forecast the Irish banking crisis less than four months prior
to the banking sector collapse.
The European Banking authority, which from 1 January 2011 took over the
responsibilities of the Committee of European Banking Supervisors (CEBS), published a
third stress test in July 2011. This stress test gave access to more detailed information on
each of the participating banks, but still has difficulties identifying risky banks. Dexia,
which came twelfth out of 91 banks, needed state guarantees from Belgium and France
less than three months after the stress tests. EBA estimates that in order to achieve the 9%
capital ratio target agreed at the Euro Summit on 26 October the total recapitalisation
needed for euro area banks is EUR106bn.
The European Central Bank is in charge of monetary policy within the euro area. Its
primary objective is to maintain price stability. The ECB Governing Council has defined
this as keeping euro area inflation (HICP) below, but close to, 2%. The ECB reserves its
main policy tool - the interest rate - to achieving this target. Other measures are used to
secure the smooth functioning of the financial system. These non-standard measures
include a covered bond programme, a Securities Market Programme (SMP) for
government bond purchases in the secondary market and long-term Refinancing
Operations (LTRO) with full allotment. The ECB Governing Council consists of six
executive board members and the governors of the national central banks of the euro area
countries. Executive board members including the ECB president serve for eight years.
The ECB is located in Frankfurt, Germany.
The Eurogroup is the main political body of the euro area and is comprised of the finance
ministers of the euro area, the Commissioner for economic and monetary affairs and the
President of the European Central Bank. The Eurogroup meets the day before the regular
Economic and Financial Affairs Council (Ecofin). During the debt crisis many key
decisions have been taken at the level of the heads of state or government of the euro
area. At the Euro Summit on 26 October it was agreed to hold Euro Summits at the level
of heads of state or government at least twice a year.
The need for fiscal tightening at the euro area level and the ongoing deleveraging in the
private sector means that euro area GDP growth is likely to remain sluggish for a
prolonged period. Exports are performing well, but the growth rotation to domestic
demand has failed to materialise. As a result, the unemployment rate, which currently
stands at 10%, is expected to remain elevated and could even start to climb again.
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Outlook for key economic variables
GDP (1) CPI (1) Unemployment (2) Govt. Budget (3) Govt. Debt (3)
EURO
2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012
Austria 2.1 3.3 1.6 1.7 3.2 2.2 4.4 4.1 4.1 -5.6 -3.5 -3.2 72.2 72.3 73.9
Belgium 2.1 2.4 1.5 2.3 3.2 2.0 8.4 7.9 8.1 -6.3 -3.5 -3.4 96.7 94.6 94.3
Cyprus 1.0 0.0 1.0 2.6 4.0 2.4 6.4 7.4 7.2 -6.3 -6.6 -4.5 60.8 64.0 66.4
Estonia 3.1 6.5 4.0 2.9 5.1 3.5 16.9 13.5 11.5 0.2 -0.1 -2.3 6.6 6.0 5.6
Finland 3.6 3.5 2.2 1.7 3.1 2.0 8.4 7.8 7.6 -4.2 -1.0 0.3 48.4 50.2 50.3
France 1.4 1.7 1.4 1.7 2.1 1.4 9.8 9.5 9.2 -7.1 -6.7 -6.1 82.3 86.8 89.4
Germany 3.6 2.7 1.3 1.2 2.2 1.3 7.1 6.0 6.2 -4.6 -3.6 -2.2 84.0 82.6 81.9
Greece -4.4 -5.0 -2.0 4.7 2.9 1.0 12.5 16.5 18.5 -7.1 -8.0 -6.9 142.8 165.6 189.1
Ireland -0.4 0.4 1.5 -1.6 1.1 0.6 13.6 14.3 13.9 -13.3 -10.3 -8.6 94.9 109.3 115.4
Italy 1.3 0.6 0.3 1.6 2.6 1.6 8.4 8.2 8.5 -5.6 -4.0 -2.4 119.0 121.1 121.4
Luxembourg 3.5 3.6 2.7 2.3 3.6 1.4 6.2 5.8 6.0 -4.4 -0.7 -1.2 18.4 19.7 21.5
Malta 3.1 2.5 2.2 2.0 2.6 2.3 6.9 6.3 6.2 -4.4 -2.9 -2.9 67.1 66.3 66.1
Netherlands 1.6 1.6 1.3 0.9 2.5 2.0 4.5 4.2 4.2 -5.7 -3.8 -2.8 63.7 65.5 66.5
Portugal 1.3 -2.2 -1.8 1.4 3.4 2.1 12.0 12.2 13.4 -7.3 -5.9 -4.5 92.9 106.0 111.8
Slovakia 4.0 3.3 3.3 0.7 3.6 1.8 14.4 13.4 12.3 -7.9 -4.9 -3.8 41.8 44.9 46.9
Slovenia 1.2 1.9 2.0 1.8 1.8 2.1 7.3 8.2 8.0 -5.6 -6.2 -4.7 37.3 43.6 47.2
Spain -0.1 0.8 1.1 2.0 2.9 1.5 20.1 20.7 19.7 -12.5 -6.1 -5.2 60.1 67.4 70.2
Euro average 1.8 1.6 1.1 1.6 2.5 1.5 10.1 9.9 9.9 -6.6 -5.9 -5.1 85.8 88.6 90.0
Denmark 1.7 1.5 1.5 2.3 3.2 2.4 4.2 4.5 4.4 -3.5 n.a. n.a. 43.7 44.3 45.8
1) % y/y. 2) % of labour force. 3) % of GDP.
Sources: Reuters EcoWin and Danske Markets
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Share in total EMU nominal GDP (EUR9.2trn) Share in total EMU government debt (EUR7.9trn)
PortugalFinland Ireland Others* Austria Portugal Finland Ireland Others*
Austria 160 87 148 27
173 180 154 66 205
284 2% 2% 2% 1% 2% 1% 2% 0%
3% Greece 3% Greece
230 329
Belgium
3% Belgium 4%
352 341
4% Germany 4% Germany
2,499 2,080
Netherlands 27% Netherlands 27%
591 371
6% 5%
Spain
639
Spain 8%
1,063
12%
France France
1,591
Italy 1,948 Italy 20%
1,549 21% 1,843
17% 24%
Country
Country
GDP EURbn
% of total EMU GDP Debt EURbn
% of total EMU gov. debt
*Slovakia, Slovenia, Luxembourg, Cyprus, Malta, Estonia *Slovakia, Slovenia, Luxembourg, Cyprus, Malta, Estonia
Sources: Eurostat Sources: Eurostat
Worrying European debt crisis debt must be reduced GDP per capita in 2010
160 90
143 2010
2010 80
140
119 70
120
97 96 93 60
100 Gov. debt limit cf
83 82 Maastrict criteria 50
80 72 68
63 61 60 40
60 48 41 30
38
40 20
18 10
20 7
0
0
Sources: Eurostat Estonia is missing
Sources: IMF
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Business Climate - Ranking of economies, sorted by Ease of Doing Business
Ease of Doing Dealing with Trading
Starting a Registering Getting Protecting Paying Enforcing Closing a Corruption
Economy Business Construction Across
Business Property Credit Investors Taxes Contracts Business index
Rank Permits Borders
Ireland 9 11 38 78 15 5 7 23 37 9 8.0
Finland 13 32 55 26 32 59 65 6 11 6 9.2
Estonia 17 37 24 13 32 59 30 4 50 70 6.5
Germany 22 88 18 67 15 93 88 14 6 35 7.9
Belgium 25 31 41 177 46 16 70 44 21 8 7.1
France 26 21 19 142 46 74 55 26 7 44 6.8
Netherlands 30 71 105 46 46 109 27 13 29 11 8.8
Portugal 31 59 111 31 89 44 73 27 24 21 6.0
Austria 32 125 57 33 15 132 104 25 9 20 7.9
Cyprus 37 26 75 66 72 93 32 19 104 22 6.3
Slovakia 41 68 56 9 15 109 122 102 71 33 6.4
Slovenia 42 28 63 97 116 20 80 56 60 38 4.3
Luxembourg 45 77 42 129 116 120 15 32 1 45 8.5
Spain 49 147 49 54 46 93 71 54 52 19 6.1
Italy 80 68 92 95 89 59 128 59 157 30 3.9
Greece 109 149 51 153 89 154 74 84 88 49 3.5
Malta n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 5.6
Singapore 1 4 2 15 6 2 4 1 13 2 9.3
Denmark 6 27 10 30 15 28 13 5 30 5 9.3
Chad 183 182 101 137 152 154 179 171 164 183 1.7
Sources: World Bank Group and Transparency International
Credit ratings and outlook
Economy Moody's rating Outlook S&P rating Outlook Fitch rating Outlook
Austria Aaa STABLE AAA STABLE AAA STABLE
Belgium Aa1 REVIEW AA+ NEG AA+ NEG
Cyprus Baa1 NEG BBB+ NEG BBB NEG
Estonia A1 STABLE AA- STABLE A+ STABLE
Finland Aaa STABLE AAA STABLE AAA STABLE
France Aaa STABLE AAA STABLE AAA STABLE
Germany Aaa STABLE AAA STABLE AAA STABLE
Greece Ca DEVELOP CC NEG CCC NEG
Ireland Ba1 NEG BBB+ STABLE BBB+ NEG
Italy A2 NEG A NEG A+ STABLE
Luxemburg Aaa STABLE AAA STABLE AAA STABLE
Malta A1 STABLE A STABLE A+ STABLE
Netherlands Aaa STABLE AAA STABLE AAA STABLE
Portugal Ba2 NEG BBB- NEG BBB- NEG WATCH
Slovakia A1 STABLE A+ POS A+ STABLE
Slovenia Aa3 NEG AA- NEG AA- STABLE
Spain A1 NEG AA- NEG AA- NEG
Sources: Bloomberg
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Key macroeconomic indicators
Structural indicators
Euro area (EMU) versus the US
When US EMU When US EMU
GDP(1) Q2-11 0.3 0.2 GDP per capita (3) 2010 34,179 27,799
Public sector (2) 2010 36.2 50.9 Unemployment (4) 2010 9.1 10.0
Private cons (2) Q2-11 70.8 57.7 Inflation (5) Apr-11 3.9 3.0
Investments (2) Q2-11 12.5 19.8 Public budget (2, 6) 2012 -6.9 -3.5
Exports (2) Q2-11 13.3 43.4 Public debt (2, 6) 2012 105.7 88.7
C/A (2) - 12M av. Q2-11 -0.9 -0.4 Long-term interest rates Apr-11 1.96 4.08
1: % q/q, 2: Pct of GDP , 3: EUR per capita, 4: % of labour force, 5: % y/y, 6: EC fcst for EMU, President's
budget for US
Sources: Reuters EcoWin and Danske Markets
Public finances
The Maastricht criteria is not fulfilled Growth in government debt has slowed
2.5 % of GDP % of GDP 2.5 110 % of GDP % of GDP 110
Gov. budget
0.0 0.0 100 General Govt debt, 100
EC forecast
-2.5 -2.5 90 90
-5.0 Euro area -5.0 80 US, federal 80
EC forecast
US, federal Euro area
-7.5 -7.5 70 70
-10.0 -10.0 60 60
-12.5 -12.5 50 50
00 02 04 06 08 10 12 00 02 04 06 08 10 12
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
Budget deficit caused by a sharp rise in German government bond spread to
expenditures US
52 % of GDP % of GDP 52 2.0 % Government bonds yield % 2.0
51 Government budget 51 1.5 1.5
50 50 1.0 1.0
Expenditure 2 year
0.5 0.5
49 49
0.0 0.0
48 48
-0.5 10 year -0.5
47 47
-1.0 -1.0
46 46 -1.5 -1.5
Revenue
45 45 -2.0 -2.0
44 44 -2.5 -2.5
00 01 02 03 04 05 06 07 08 09 10 00 02 04 06 08 10
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
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National Account
Moderate GDP rebound Output gap has not narrowed yet
122.5 Index 2000=100 Index 2000=100 122.5 Output gap
120.0 120.0 %-points
GDP 4
117.5 117.5
constant prices, sa.
115.0 115.0 2
112.5 112.5 0
110.0 Euro area 110.0
107.5 US 107.5 -2
105.0 105.0 -4
102.5 102.5
100.0 100.0 -6
Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
00 02 04 06 08 10
EMU OECD USA
Sources: Reuters EcoWin and Danske Markets Sources: OECD
Private consumption at 2008 level Investments have not fully recovered
130 Index 2000=100 Index 2000=100 130 130 Index 2000=100 Index 2000=100 130
125 Private consumption 125 120 120
Gross capital formation
constant prices, sa. 110 constant prices, sa. 110
120 120
100 100
115 Euro area 115 Euro area
90 90
110 US 110
80 US 80
105 105 70 70
100 100 60 60
00 02 04 06 08 10 00 01 02 03 04 05 06 07 08 09 10
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
Export and trade
Exports have almost recovered Small current account deficit
160 Index 2000=100 Index 2000=100 160 1.5 % of GDP % of GDP 1.5
Current account, sa.
150 Exports, constant prices, sa. 150 1.0 1.0
140 140 0.5 Euro area, 0.5
Euro area Ecofin forecast
130 130 0.0 0.0
120 120 -0.5 Euro area -0.5
US
110 110 -1.0 -1.0
US
100 100 -1.5 -1.5
90 90 -2.0 -2.0
00 01 02 03 04 05 06 07 08 09 10 00 02 04 06 08 10 12
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
The euro strengthened in the 00s Exports to China are rising
170 E f fe c t iv e 110 3.5 3.5
E U R /U S D % of GDP Exports by country % of GDP
160 e xc h a n g e ra te 105
150 3.0 UK 3.0
140 100
2.5 2.5
130 >
100 exchg. 85 China
90 1.0 Poland 1.0
80
80
75 0.5 >
1 0 7 .5 3
55 55 1 0 5 .0 2
1 0 2 .5 1
50 50
1 0 0 .0 0
45 45 9 7 .5 -1
USA 9 5 .0 -2
40 Euro Area 40
9 2 .5 > -50 12 months -50
-3 5 -1 3 .5
85 90 95 00 05 10 00 01 02 03 04 05 06 07 08 09 10
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
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Labour market and demographics
Unemployment rate has topped ... and employment is recovering slowly
10.5 % % 10.5 110 Index, 2000=100 Index 2000=100 110
10.0 Unemployment rate, sa. 10.0 108 108
Employment
9.5 9.5 106 106
9.0 US 9.0 Euro area
104 104
8.5 8.5
102 102
8.0 8.0
7.5 7.5 100 100
Euro area US
7.0 7.0 98 98
6.5 6.5 96 96
00 02 04 06 08 10 01 02 03 04 05 06 07 08 09 10
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
Productivity hampered by high ULC High wage increases
125.0 125.0 4 .5 4 .5
Index 2000=100 Index 2000=100 % y/y % y/y
4 .0 T o t a l h o u r ly la b o u r c o s t 4 .0
120.0 120.0
3 .5 N e g o t ia t e d 3 .5
115.0 115.0 w ages
ULC, Euro area 3 .0 3 .0
110.0 110.0
2 .5 2 .5
105.0 105.0
2 .0 2 .0
100.0 100.0
Productivity, Euro area 1 .5 C o m p e n s a t io n p e r e m p lo y e e 1 .5
95.0 95.0
1 .0 1 .0
00 02 04 06 08 10 00 02 04 06 08 10
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
Housing market
Housing investments are recovering House prices stabilising
7 .2 5 % o f G D P 7 .5 8 25
% y/y 7 % y/y N e t b a la n c e 20
7 .0 0 5 .0 6 15
6 .7 5 2 .5 5 10
% y/y > > >
5 .5 0 H o u s in g -1 o f C o n s t r u c t io n -2 0
> 3 .0
110 110 125 2 .5
Euro area 120 2 .0
105 105
115 1 .5
100 US 100 > 5 .0 0 2.0
50 2 .5 -10 Loans to household 1.5
25 0 .0 -20 1.0
Loans to non-financial corporations
0 -2 .5 -30 0.5
w53 w14 w28 w42 w2 w14 w28 03 04 05 06 07 08 09 10 11
09 10 11
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
ECB refinancing operations ECB policy rates
900 900 6 6
EUR bn EUR bn 800 % Marginal lending facility %
800
5 Refinancing rate 5
700 700
600 600 4 4
500 LTRO 500
3 3
400 400
300 300 2 2
200 200
MRO 1 1
100 100 Deposit facility
0 0 0 0
07 08 09 10 11 99 00 01 02 03 04 05 06 07 08 09 10 11
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
ECB marginal lending and deposit
Euribor-Eonia 3M spread
facility
25.0 450 2.00 8.0
EUR bn EUR bn
22.5 400 1.75 7.0
> > 5.0
15.0 250
facility >>
12.5 200 1.00 4.0
10.0 150 0.75 3.0
7.5 100
0.50 2.0
5.0 50
2.5 0 0.25 1.0
0.0 -50 0.00 0.0
00 01 02 03 04 05 06 07 08 09 10 11 05 06 07 08 09 10 11
Sources: Reuters EcoWin and Danske Markets Sources: Reuters EcoWin and Danske Markets
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Bank lending survey
Tightening in credit standards on loans
Lower enterprise demands for loans
to enterprises
80 80 50 50
70 Net bal Net bal 70 Net bal Enterprise demand for loans Net bal
60 60 30 30
Realised, enterprises Expected
50 50
10 demand 10
40 40
30 30
-10 -10
20 20
10 10 Recent demand
-30 -30
0 0
-10 -10 -50 -50
-20 Expected, enterprises -20
-30 -30 -70 -70
03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 11
Sources: Reuters Ecowin and Danske Markets Sources: Reuters Ecowin and Danske Markets
Tightening in credit standards on loans Lower demand for loans for house
for house purchase purchase
80 80 50 50
Net bal Net bal Net bal Net bal
70 70
60 60 30 Expected house demand 30
50 Expected standards, housing 50
40 40 10 10
30 30
-10 -10
20 20
10 10
-30 -30
0 0
-10 -10 -50 -50
-20 Realised standards, housing -20 Realised house demand
-30 -30 -70 -70
03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 11
Sources: Reuters Ecowin and Danske Markets Sources: Reuters Ecowin and Danske Markets
Tightening in credit standards on
Lower demand for consumer credit
consumer credit
80 80 50 50
70 Net bal Net bal 70 Net bal
Expected demand, consumers Net bal
60 60 30 30
50 Expected standards, consumer credit 50
40 40 10 10
30 30
-10 -10
20 20
10 10 -30 -30
Realised demand, consumers
0 0
-10 -10 -50 -50
-20 Realised standards, consumer credit -20
-30 -30 -70 -70
03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 11
Sources: Reuters Ecowin and Danske Markets Sources: Reuters Ecowin and Danske Markets
Growth in lending for house purchases Credit standards for SMEs
15.0 15.0 70 70
% y/y Lending for house purchases % y/y Net bal Net bal
12.5 12.5 60 60
Credit standards for SMEs
50 50
10.0 10.0
40 40
7.5 7.5 30 30
5.0 5.0 20 20
10 10
2.5 2.5
Credit growth, total 0 0
0.0 0.0 -10 Credit standards -10
for large enterprises
-2.5 -2.5 -20 -20
00 02 04 06 08 10 03 04 05 06 07 08 09 10 11
Sources: Reuters Ecowin and Danske Markets Sources: Reuters Ecowin and Danske Markets
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13 | 1 November 2011
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