The economic soap opera seems to be never ending for the European region's economies. Ag lenders and producers want to know how the condition of Europe will impact their loan portfolios and profitability, respectively.
First, let us clarify this region's economy. The overall European Union (EU) includes 27 countries with a total economy of $16 trillion, compared to a $15 trillion U.S. economy. The Eurozone countries include 17 countries that trade with a common currency, the euro. While the reported unemployment rate in the U.S. is 8.1%, the EU is at 10.2% unemployment, and Eurozone countries come in at 10.9%. Unemployment is running as high as 24% in Spain and nearly 22% in Greece. While projected 2012 GDP growth by the International Monetary Fund (IMF) is 2.1% in the U.S., it is 0.3% growth rate for the EU, and a -0.3% for the Eurozone. Twelve of the 17 nations in the Eurozone are officially in recession.
How does this data and economic perspective influence the pocketbooks of American producers and ag lenders’ portfolios? First, the Eurozone will make every attempt to devalue its currency in an effort to grow its way to prosperity to cover its large amounts of debt. Europe’s campaign for fiscal austerity, designed to help shrink the budget deficits, may be derailed by the socialist-leaning government just elected in France, that being Mr. Hollande. These elements create economic uncertainty throughout the region.
The interconnectedness of the world economies, particularly with the EU being China's largest trading partner, has a large impact, slowing down the second largest economy in the world and other emerging and growing economies. These economies have fueled a nine-year super cycle for U.S. agriculture, particularly grain, row crop and some of the livestock sector. This, in turn, could reduce profit margins and place some producers who have high fixed cost in land and cash rents in a challenging position.
The bottom line is that Europe has a large influence indirectly on U.S. agriculture through currency values and trade with the emerging nations. This will be a slow moving economic soap opera that must be monitored very closely by agribusiness managers and the ag lending sector, which is in the risky business of lending money.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]