World-renowned for its delicious chocolate, accurate watches and safe bank accounts, Switzerland considers itself an island of political and economic stability at the heart of Europe. As a measure of success, the Swiss economy survived the 2008-09 financial crisis experiencing fewer devastating consequences than other industrial countries. Switzerland was not completely immune however, as the government had to come to the rescue of the financial industry in the fall of 2008.
Fearful of the potential fallout if banking giant UBS declared bankruptcy, the Swiss government deemed it necessary to bail it out in October 2008. The rescue package included a $6 billion convertible bond issued by the government and the establishment of a fund, supported by the Swiss National Bank, into which UBS transferred toxic assets once worth around $60 billion. In view of an annual GDP of roughly $550 billion the Swiss public entered a huge financial risk by saving UBS.
Since then, the Swiss economy seems to be back on track with slow but positive GDP growth. As immigration and energy issues dominate the media in anticipation of upcoming national elections, many seem to have forgotten about the complex and unresolved risks regarding the financial sector: Banks like Credit Suisse and UBS could still push the economy on the verge of collapse: They remain ‘too-big-to-fail” and profit therefore from an implicit state guarantee.
Europe is talking energy and there is no easy way out of existing dilemmas: While nuclear and fossil-fueled power plants entail considerable risks, most sources of alternative energy are not yet considered mature enough to fuel Europe’s economies on their own. Like elsewhere across the globe, Europeans are facing tough challenges in their attempt to secure a clean, reliable and affordable power supply.
As in every crisis, the risk looms that countries just look after their own narrowly-defined national interests and either ignore or forget the advantages of a regionally coordinated approach. In their struggle for secure energy, European nations should not lose sight of the potential of the common electricity market. In the long run, it could play a crucial role in enabling a more efficient energy future both from an economic and an ecological point of view. Yet, many obstacles still need to be overcome at the moment.
In an integrated market, electricity could be exchanged efficiently across the continent, connecting demand to the most inexpensive supply no matter where in Europe. Consumers could benefit from choosing from a wide range of suppliers, which in turn would boost competition and innovation. Currently, however, the European electricity markets remain regionally fragmented. Countries and companies are not investing enough in transmission capacities across national borders because they struggle to agree on the financial burden-sharing of these expensive projects. As long as national grids are not fully interconnected, trade cannot evolve.
While the media spotlight has been focused on the uprisings in Libya and other Arab countries, violent protests have also erupted in Europe. Over the past weeks thousands of protesters have taken to the streets in Croatia’s capital Zagreb, urging their government to step down.
Protesters are accusing the governing HDZ Party (Croatian Democratic Union), as well as the opposition, of incompetence in dealing with economic stagnation and endemic corruption. It seems that many Croatians are not only disillusioned with their government, but with the political system as a whole. Moreover, a recent poll suggests that only 49% of Croats are still in favor of joining the EU as their dissatisfaction with domestic politics translates into a skeptical attitude towards Brussels.
In light of the ongoing political unrest, the question of whether Croatia is ready and willing to become the 28th member state of the European Union remains unclear.
The Mafia and the State
Croatia is now only few steps away from fulfilling the EU’s accession criteria: Out of 35 accession negotiation chapters, 28 have been closed. The chapter dealing with reform of the legal system, however, is proving to be a hard nut to crack. In a country plagued by corruption, distinguishing politicians from criminals is not always easy. According to the Index of Economic Freedom, Croatia’s economy and politics are rated as corrupt as Tunisia’s.
Will Venezuela be next to stumble into a debt crisis – ironically, a country well endowed with the world’s most sought after resource? In its most recent issue, The Economistraises this question, as rumors swirl that the Bolivarian Republic might not be able to repay its international obligations between 2012 and 2015. The possible default of one of the world’s foremost oil producers should give the international community pause although any crisis is unlikely to materialize immediately. However, as soon as oil prices fall considerably below $100 per barrel, the Venezuelan economy will be deprived of its main foreign income, and a debt crisis might not be far behind – possibly threatening President Hugo Chavez’ long rule.
L’état, c’est Hugo
Despite high oil prices, Venezuelan GDP has been contracting for the last three years and inflation has been over 20 percent since 2007. Exports have been falling steadily and because power and water infrastructure falls short of much needed investment, Venezuelans are often forced to take cold showers. Even productivity in the state-owned oil company PDVSA has decreased by a third since Chavez took power in 1999. Chavez is infamous for his erratic behavior and his dislike of the private sector. During his 12-year rule, he has nationalized hundreds of domestic and foreign companies, closely regulated the economy and eliminated market mechanisms. In this way Chavez has paved the way for widespread corruption and inefficiency. Moreover, he has been governing by decree since December 2010, which grants him almost unlimited power to push through policies without parliamentary control. In Venezuela l’état, c’est Hugo. In this atmosphere of impunity many Venezuelan entrepreneurs have given up their businesses, and foreigners are increasingly reluctant to invest. In a recent country risk assessment Venezuela ranked 93 out of 100 – with civil-war plagued neighbor Colombia ranking a much higher 51.
The Achilles heel
As the government has successfully dismantled the private economy, Venezuela’s dependence on revenues from oil exports has increased, and imports have risen as many goods are no longer produced in Venezuela. Oil production makes up about a third of GDP and generates the lion’s share of the government’s revenue. Fluctuating oil prices are thus the Achilles heel of the whole economy. As soon as oil prices fall, Chavez might find it difficult to keep up public spending and to repay international obligations (net public debt was 29 percent of GDP in 2010). This might not only lead to a debt crisis and hamper economic growth but also to a decline in Chavez’ popularity. With plans to run again for president in 2012, he is in dire need of oil money to subsidize basic goods such as food. Otherwise the poorest will be hit even harder by rising food and living costs, with their incomes eaten up by staggering inflation – perhaps just like Chavez’ personal political future.