From the Ground in Europe

With the Cyprus controversy raging, you may wonder why I am sharing with you a couple of stories from my current business trip to Spain. I do so because I believe they crystalize in a vivid manner issues that are key to Europe’s future.

On the way in from the airport yesterday, I used my primitive Spanish to seek the insights of the taxi driver. He confirmed that the sense of near-panic has subsided quite a bit in recent months, and especially after the dramatic “whatever-it-takes” policy statement by the European Central Bank. He was quick to add, however, that the underlying economic situation in Spain remains horrid.

For the average Spaniard, the recent improvements in financial indicators have not materially boosted living conditions. Yes the counterfactual would have been less favorable – in that citizens would have been much worse off had the financial turmoil persisted. But counterfactuals are hard to grasp; and they certainly don’t translate into higher incomes and more jobs.

Many of the taxi driver’s friends and family members have been unemployed for quite a while. They regard their prospects as dim. Meanwhile, their savings are dwindling. They have little faith in the ability of their government to continue to provide solid social safety nets.

These problems are especially acute for the poor, the young, pensioners and other vulnerable segments of the population.

Then there is the issue of insured bank deposits. I asked the taxi driver whether he was worried about the safety of his savings kept in the local banks, especially after the surprise announcement of the levy on Cypriot bank deposits. He replied no. Then he quickly added two qualifiers: “I don’t have much money to begin with; and I keep most of it at home rather than in the bank.”

My trip from the airport to the hotel thus confirmed what most of us know well: With the exception of a few countries – particularly in northern Europe – the old continent is struggling; and the most vulnerable segments of the population are at great risk.

This morning I was expecting a somewhat different perspective. I was meeting with two high-powered professionals with secure jobs and global linkages. And, at least in theory, they are also those most able to protect their savings and other assets.

Well, my hour long conversation suggests that the challenges are no longer limited to the lower-middle and lower classes of the population. It seems that even the better-off segments are facing pressures and uncertainties. As one of them put it, “people we know well are now unemployed, and many are increasingly unable to meet their mortgages and rents.”

They too are no sensing little relief from the improvements in the financial indicators. And now, they seem more open to the old adage that you cannot remain a great house in a pressured neighborhood.

So, as they scramble to sort out the mess in Cyprus, European officials would be well advised to constantly remind themselves of a reality that I suspect extends well beyond Spain: Despite all the happy talk about smaller deficits and lower sovereign credit spreads, citizens are yet to feel any notable improvement in their actual standard of living and in their prospects.

Day in and day out, this situation undermines the population’s confidence in the timely responsiveness of their elected representatives, the political system and traditional political parties. The longer this persists, the harder it will be to pivot to the type of policy reforms needed to decisively avoid more years of economic difficulties.

This article contains the current opinions of the author but not necessarily those of PIMCO. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission.

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