A year ago it looked as though the end game was in sight for
the euro, then things quietened down.
The general view was that somehow the Eurozone would muddle its way
through to a solution over time. However
the Eurozone reappeared last week in the business, economic and political
sections of the media and it seems nothing much has changed or is likely to and
the slide continues.
Mrs. Merkel mentions the war
Stern Auntie Angela is once again pushing for stricter
Europe-wide control over national budgets, still pursuing the idea that if only
everyone could be more like the Germans then all would be well. This is diametrically opposed to the French
position that wants banking union or in other words if only everyone could be
more like the French then …. Well you get the picture.
The ability of the Eurozone politicians to come up with
policies and proposals that effectively cancel each other out is not altogether
surprising if you look at European history.
Differences like this arose regularly sometimes leading to war which
would sort it out one way or the other.
Now that option is not available (thankfully) but the Eurozone doesn’t seem
to have found an alternative that works so the differences and the problems
they cause rumble on.
Of course this is what the euro was supposed to be all about. A common currency leading to “ever closer
union” would be the mechanism by which all differences would be resolved. Indeed Auntie Angela has warned sternly of
the risk of a return to conflict between European countries if the euro fails. However it is clear from a number of
developments from last week that the pressure on the euro is building.
Austerity light
With GDP throughout the Eurozone falling and even the German
economy feeling the pinch it seems everyone (apart from stern Auntie Angela) is
questioning whether austerity has gone too far.
Almost any country that cares to ask is being granted an extension to
deficit reduction targets. The IMF came
out with a strange argument that George Osborne was “playing with fire” by
pursuing the current rate of deficit reduction in the UK and that there is the “fiscal space” in the UK to indulge
in a bit of “fiscal loosening”. The
mood appears to be swinging towards the idea that some sort of “light touch”
austerity is the answer because austerity itself has become the problem.
All this is a classic and big scale example
of tackling symptoms rather than the core problem which is the euro
itself. In fact it’s worse than that. When you tackle symptoms and this produces
consequences you don’t much like this causes you to tackle these symptoms as
well, so you get further and further away from the core problem.
No FTT no €30bn
An example of the Eurozone focusing on symptoms and not the
problem is the attempt by Germany
and 10 other countries to introduce a Financial Transactions Tax (FTT). As the tax will apply to trades across the
world if they originate in one of these 11 countries it is not surprising that many other countries including the US
and UK
are against it. A Swedish minister has
warned that it will be a disaster and will not work. He should know as he actually introduced it
in Sweden
and found it was a disaster and didn’t work.
Last week Jens Weidman President of the Bundesbank no less
announced that “From a monetary policy point of view, the FTT in its current
form is to be viewed critically”. He
also warned that it could raise the costs of government borrowing and outweigh
the revenues raised by the tax. I think
we can take that as a “nein”.
The only argument I have found in favour of the FTT is that
it could raise up to €30bn which would be used to …lower government deficits! Well perhaps, but if it raises borrowing
costs then once again the EU will have cancelled itself out and long since lost
sight of the real problem.
George Osborne has taken to matter to the European
courts. It would be rather good if he
could get the European Court of Human Rights to rule against FTT. Would be almost worth putting up with Abu Qatada to win that one.
Whatever it takes or whatever it costs?
One of the moves that kept the lid on the whole mess for a
while was the European Central Bank (ECB) becoming in effect the lender of last
resort in the Eurozone. Last summer it
launched its emergency rescue strategy, Outright Monetary Transactions (OMT), buying
up the bonds of countries like Spain
and Italy
and bringing about a spectacular fall in their borrowing costs. This followed Mario Draghi’s statement that
he would do “whatever it takes” to deal with the Eurozone’s sovereign debt
problems.
However he omitted to mention that his plan required the
German taxpayer to “pay whatever it takes”.
Last week the Bundesbank having poo pooed the FTT did the same to OMT,
taking it apart point by point. Germany ’s
constitutional court is due to rule on the legality of OMT in June. If it rules against OMT it pretty much means
the end of the euro. With stakes that
high the markets seem confident the court will find some formula to avert that
kind of crisis. However it does show
just how close run this is all getting.
Italian job
Now that we have a new Italian government perhaps we will
see some action to stop the Italian economy choking to death. However be careful what you wish for. Strangely Italy
is not fundamentally a basket case, its problem being lack of competitiveness
brought about by letting its labour costs race 30pc ahead of Germany ’s. In particular it has a primary surplus of
2.5pc of GDP (something George Osborne can only dream about currently). This means Italy could leave the EMU and
regain competitiveness without facing a funding crisis.
So why doesn’t Italy do just that? Mainly because its political leaders have not
so far been prepared to play rough. The
latest PM Enrico Letta does
not look like the man to change that and the government he now heads is
unlikely to last long enough to achieve anything meaningful. But even with a PM who was very nearly named
after a cup of weak coffee, you never know.
Why does all this matter
You may be wondering why I am boring you all to death with
this stuff. Last week the UK GDP figures were published
and apparently we managed a whole 0.3pc growth in the last quarter, avoiding
the triple dip, which sounds more like the latest offer from KFC than a meaningful
economic concept. Also it was reported
that many businesses are sitting on mountains of cash and are reluctant to
invest and even more reluctant to borrow to invest. Behind the flat economy and reluctance to
invest is uncertainty and that uncertainty is all about what’s going to happen
in the Eurozone. Even when nothing does
happen what might happen is scary enough to keep most CEs and FDs awake at
night and holding on to their cash cushions.
So the crisis and the uncertainty are set to continue. The UK ’s and indeed
the world economy cannot recover properly until the EU faces up to the fact
that the euro in its current form just cannot work.
So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.
So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.
