Hamish McRae: It's the weak who are being made to suffer

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The Independent Online

There has been so much anguish about the future of the eurozone post the Irish rescue – which other countries will need a bailout too? – that we tend not to notice the extent to which some parts of the European economy are doing very well, while other parts are lagging badly. So it is not just that financial conditions are diverging; economic conditions are diverging too.

Insofar as short-term market reactions matter, the past couple of days have been discouraging. Ireland has not re-established its creditworthiness; indeed, many seem to be assuming that it will, along with Greece, eventually default on its debts. Some of us happen to think that will turn out to be wrong, but this is not what the price of its debt suggests.

Worse, not only have long-term rates for Portuguese and Spanish debt risen, suggesting that the markets expect that they will indeed need a rescue; you can see these doubts spreading to Italy. Italy has now to pay two percentage points more on its debt than Germany, the widest gap since the euro was launched in 1999, and nearly one percentage point more than Brazil. Spain has to pay three percentage points more than Germany.

These tensions will continue in the coming weeks and it is hard to see a happy outcome. But the information coming through about the real economy is also troubling. Take yesterday's eurozone unemployment figures. The overall average unemployment rate rose from 10 per cent to 10.1 per cent. That may not sound a lot, but it is another 80,000 people out of work. Moreover, this overall figure conceals big differences within Europe.

Germany's rate is only 6.7 per cent, but Italy's is 8.6 per cent (up sharply on the month), and France is at 9.8 per cent. These are troubling enough (the UK figure is 7.7 per cent) but Spain is at 20.7 per cent, Ireland 14.1 per cent and Portugal 11.0 per cent.

Much the same picture comes if you look at economic growth. To take some of Barclays' forecasts, Germany is expected to grow by 3.2 per cent this year, but Italy looks like growing by only 0.8 per cent and Spain's economy will shrink by 0.2 per cent. Greece has the worst of it all, shrinking by 3.8 per cent this year and another 2.3 per cent next. At least Ireland is expected to grow by 2 per cent next year, not great, but any growth is better than none.

If you think about it, this is harsh. The weakest countries are being punished the most. Not only do their governments have to pay the highest interest rates; their companies do, too. It is hard to justify in any way the speculative boom that led to this current distress but the reality is that the over-borrowed economies face years of cold turkey.

This was not the plan when countries applied to adopt the euro. The common talk is of a rescue for these countries and what is happening is indeed a rescue in the sense that their governments will be able to go on paying their bills – the salaries of their civil servants, the pensions of retired people and so on. But they are not being given the money, for these are loans not grants, and it is expected they will be repaid with interest. It is hard to see the alternative but it is a harsh outcome and we should not forget that.

What we can learn from Brazil about aid

As economic power shifts to the emerging nations, so too is the focus of aid-flows. We still think of aid as something that the West does for poorer countries, though China is now investing far more in infrastructure in Africa than all the aid programmes put together. In these projects, China is not giving aid as such: it is putting in roads, railways, ports and the like to get resources out. But it and the middle-income countries are now contributing to more conventional aid, as a new paper by the Overseas Development Institute notes.

About 10 per cent of total aid-flows now come from within the emerging world, with China contributing $2bn a year and India and Brazil each about $1bn a year. That would put Brazil ahead of smaller OECD countries such as Finland. The growth for Brazil is remarkable. If you take technical co-operation projects as a marker, in 2004 there were just 19 new projects, whereas in 2009 there were 413. According to the ODI, this rapid growth has created difficulties: can Brazil manage its aid programmes in an orderly and effective way? The ODI argues not.

But it seems to me that we should not judge the effectiveness of aid between middle-income countries in the same way as we look at our own programmes, which are far from optimal anyway. The ODI points out that the developed countries have 50 years of experience in developing and assessing aid programmes. But I just wonder whether a fresh and different approach might actually be more use than our experience. Economic reforms in Brazil have recently been hugely successful. It is much closer to the whole development process and as a result maybe has as much to teach as to learn.

Marry someone who can do the maths

A final word about numeracy. Research published today in The Economic Journal shows that the more numerate people are, the richer they become. Studies in both the UK and US show that if you adjust for everything else – literacy, social background and so on – people who can do their sums have more wealth than those who cannot. The US study is particularly stark. Couples where both spouses could give the correct answer to three maths questions had an average wealth of $1.7m. Couples who got all the answers wrong were worth only $200,000. Moral: if you can't do maths chose a partner who can – and let them take the financial decisions.

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