Saturday, March 23, 2013

Luigi Foscale on Eastern Europe

Why if in Italy a bank goes bankrupt nobody in the world would care about, while if maybe the island of Cyprus (whose value is equal to two Italian banks) the world seems to crumble?

This month I posed myself this question and I answered with what you can read below.

This article’s subject is aimed to show you how some of the weak economies could provide some inputs to reflect on.

We have examined a number of Eastern European economies and we compared them to the average West European data, and to the so called rich countries, among them: USA, UK, Germany, Finland, Denmark and Israel. 
Of these countries we have taken into consideration the number of inhabitants, the median age, the life perspectives, the unemployment rate, the total GDP, the GDP per capita, in the years 2010/11/12 and we also made a forecast. 
First of all we examined Poland. Among all the East European countries Poland is a relatively young country with 38,8 median age. It’s the 21st country in terms of GDP with $802 bn. The unemployment rate is of 20.7% that is particularly high. A positive element is the GDP per capita, that goes from 19,700 USD in 2010 to 20,500 in 2011 to 21,000 in 2012. 
The second country we picked up is Romania. A country with a large population with a youthful median age. Its GDP IS OF $274 bn, the 49th world’s economy. Even in this case the GDP per capita has grown from 12,400 to 12,800 since 2010 to 2012.  
The most meaningful data is the unemployment rate that is of 4,3% only, which is an excellent result if we consider the middle term perspectives.  
The third country we look into is Bulgaria that despite it has less inhabitants respect to Romania and Poland, it has grown its GDP per capita from 13,500 to 14,000 to 14,200 for the years 2010 /11 and 2012.
Greece has few inhabitants more than Bulgaria (10m vs 7m),however its data are negatives, because of the economic crises that crunches the country since a while. The unemployment rate is 24.4%. Almost a person over 4 is unemployed and he’s looking for a job. Besides, Greece has suffered an increasing continuous loss of its GDP per capita from 28,700 to 26,700 to 25,100.
Dramatic data. The drastic drop of the GDP per capita leads the country to have a contraction in their productivity, that is echoing in job cuts, first of all in the private sector. 
The private sector employees have a drop in their consumption, companies pay less taxes and the government has less budget also for public servants who are sent home. This way they create more unemployment and more crisis. The country appears to be in a self-feeding downward spiral with no chance of going upwards.
The GDP per capita increases in Poland, Bielorus, Bosnia, Bulgaria, Czech Republic, Hungary, Macedonia, Ucraine (+10% GDP per capita in 3 years!) Russia (+10% GDP per capita in 3 years!) and Azerbaijan. 
We’ll now analyze the numbers in terms of absolute value. Greece has a GDP o f 280, Poland 802, Romania 274, Israel 247, Finland 198, Denmark 208. 
If you look at the Rumenian GDP, you’ll notice that the Rumenian economy isn’t that small. This is due to three factors. A fiscal policy that sees an average taxation of 16% that allows the black market to surface in a natural way and not in a coercive way like it happens in the so called “rich economies”. 
Romania is an example of how you can take advantage from globalization, because since the end of the Communist era, back in the 90s, the local governments, have created the basis to attract foreign investors who brought there their production plants and chains. 
This led to a substantial growth of the GDP and a growth of industrial activities. In practice even governments are in competition among them to attract the good customers (foreign companies and investors).
Another data that is meaningful is unemployment. Let’s see the countries that we all consider as rich. The unemployment rate in Liechtenstein is of 2,8%, in Switzerland is 3%, Japan 4,4%, Austria 5,2%, Denmark 6,4%, Germany 6,5%, Finland 7,8%, USA 8,2%.
You think all these countries are rich?
Under a certain point of view you could affirm that in rich countries there’s a high employment rate. This is supported by an economy that produces products demand. In practice in rich countries demand supports jobs. 
So it’s better to invest in those countries which have a high employment rate?
Sure, because countries with high employment rate have average salaries that keep growing. Average salaries are connected to the residential real estate values. If we compare the average salaries with the real estate prices, you will notice that values are balanced. The average salary is a crucial indicator through which I decide where I am going to invest in real estate.
Now if I am telling you that Azerbaijan has an unemployment rate of 1%, Croatia of 3,4%, Russia 6%, Bulgaria 9,9, Romania 4,3%, you think these are business opportunities too?
While you are reading these words, if you already asked yourself if this giant world crisis was manipulated by someone, now you know it’s better to learn as much as possible, studying the economic data in order to have a clear idea of the situation. An idea that has to be yours only and not dictated by someone else.
If you don’t understand the numbers and you think they are difficult to grab, don’t worry, I want you to know that they are made difficult on purpose, because this way those in the government can better control their own interests. 
In the end it’s really Cyprus so scary with its 10 bn bailout, that is a bit more of what has been given to save an Italian bank or two years of property tax in Italy? 
Dear Reader open your eyes!
Luigi Foscale

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