Archive for Eurozone crisis

What if the Eurozone just keeps applying sticking plasters?

Posted in economics, Politics with tags , , , , , on June 21, 2012 by Tom Leatherbarrow

A thought occurred to me watching Channel 4 News last night.  We are all it seems waiting for some anarchic / cathartic moment with the Eurozone crisis.  A cataclysmic earthquake which causes the entire structure to fall apart and countries forced to start printing their own money.  We are all expecting to see massive capital flight to safe havens, terror stricken faces on central bankers, horrified Germans, delighted Tory MPs and various economists trying to tell us that they predicted this all along.

But what if this doesn’t happen?  What if the Eurozone leaders keep on applying sticking plasters just big enough to stem the bleeding but not big enough to finally cure the patient?

I suspect we have been conditioned to expect the anarchic resolution scenario in this country in part due to our ejection from the Exchange Rate Mechanism in 1992.  That day all hell broke loose with massive currency trades, emergency interest rates of 15 per cent, a Chancellor of the Exchequer caught in the headlights and screaming currency arbitrage traders bellowing at each other across London trading floors.  Oh and George Soros looking very happy because he made billions that day and Peter Jay of the BBC seemingly the only person who knew what the hell was going on!

Ultimately, however, the experience was cathartic.  The UK economy, released from the stranglehold of the ERM blossomed, which is what many predict will happen if the likes of Greece and Spain are cut adrift or leave the Eurozone of their own accord, devalue their currencies and use inflationary pressure to reduce debt.  Then again, nobody is really sure.

Personally, I am beginning to believe that the key date is not when Greece or Spain’s next government bond repayment is due but the German elections when Angela Merkel has to face the electorate next year.  Once Merkel herself is released from trying to get re-elected then we might see some progress on a growth strategy for the Eurozone.

As I write I note that Angela is talking at the G20 about getting the “big bazooka” out to finally deal with this.  We’ll see, I’m increasingly of the belief that European leaders are not up to the task and that we are condemned to one sticking plaster after another with European, not just Eurozone, economies bumping along the bottom for a good while yet!

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Cameron’s Veto: is this a Waterloo or an Arnhem?

Posted in economics, Politics with tags , , , , , on December 12, 2011 by Tom Leatherbarrow

Sometimes it is best to wait before blogging on events. I took this view on Friday before commenting on David Cameron’s veto at the EU Summit. Better to wait and think through the implications before hitting the keyboard.

Depending on which newspaper you have read over the weekend, individual views on the veto will differ. If you are a Telegraph or Mail reader it is likely to be the greatest British victory on the Continent since Waterloo. Guardian and Independent readers will doubtless form the view that the UK is about to be thrown out into some sort of diplomatic nuclear winter. Readers of the Economist will probably conclude that the Prime Minister didn’t really have a clue what was going on and hopelessly overplayed his hand!

So what is the truth of the matter? My own view, having given it much thought, is that the leaders of the UK, France and Germany are engaged in a game of high stakes poker with bluff and counter-bluff the order of the day.

Whilst this may seem like a European issue, national considerations are playing a key role. The French President, deeply unpopular at home, faces re-election on April 7th. He faces his electorate with an economy tanking, rising inflation (anybody who has been to France recently will notice how expensive it has become), a cut in his country’s credit rating and his major banks all but bankrupt. Out of the fog, his election strategy is becoming clear. He intends to say: “It’s not my fault, it’s those Brit’s and their dodgy banks who have infected all the rest. But don’t worry, I’ve thrown them out of Europe, so vote for me!”

Chancellor Merkel does not face re-election until September 2013, but if she is to stand any hope she needs to whip the rest of Europe into shape double-quick. However, the German public is deeply unhappy with having to prop up other countries. They haven’t gone through years of fiscal austerity only to go bust bailing out the Greeks and Italians.

Similarly, Frau Merkel’s strategy is also becoming clear: “It’s not my fault, we need much closer fiscal integration to make sure we, sorry I mean the EU, has oversight of other country’s budgets so they can’t do it again. Vote for me!”

Of course the irony is that European leaders still think they are in charge of events. The reality is that the bond markets will have as much, if not more, say in how events unfold. The key point of last week’s summit is that it did absolutely nothing to solve the immediate liquidity crisis that is enveloping the Eurozone. The ECB still can’t buy bonds, we have no Eurobond, yields are going through the roof (as I write Italian ten-year bond yields are up by 15 basis points and rising) and the ratings agencies are downgrading as fast as they can type.

So what is the PM’s game? Like his European counterparts he is also looking over his shoulder at the Eurosceptics within his own party. My guess is that the PM has made the calculation to temporarily appease the Tory right in the hope that he sees the back of President Sarkozy in April. Alternatively, the whole Eurozone could go bust and break up at which point last week’s veto won’t make a blind bit of difference.

The nightmare scenario for the PM is that the French socialists fail to get their act together and split their vote, which last time let in Jean Marie Le Pen of the National Front. In 2007 the socialists had to swallow their pride in the second round of voting and get behind Sarkozy to keep Le Pen out.

We are therefore in the extraordinary situation that a British Conservative Prime Minister is hoping for a socialist victory in France so that he can get rid of his arch-enemy and, he hopes, break up the Merkel/Sarkozy relationship.

Today, the Prime Minister basks in the adoring headlines of the right wing media comparing his triumph to Waterloo. He must hope that the reality is not more like an Arnhem, where a flawed strategy and faulty intelligence led to annihilation.

George splashes the cash but is that an elephant I spy in yonder room?

Posted in economics with tags , , , , on November 29, 2011 by Tom Leatherbarrow

Just a quick take on the Chancellor’s Autumn Statement. How can I do that when he has just begun speaking in the House of Commons you ask? Well, this statement has been so well trailed in the press that we know exactly what Georgie is going to say with the exception of how big the deficit actually is!

We know, for example, that the Chancellor is going to unveil an infrastructure investment plan worth at least £25bn, the lion’s share of which will come from pension funds. We also know that he has plans to unlock £40bn of bank lending for small businesses which the government will underwrite and from somewhere (loose change down the back of the Treasury sofa presumably) we’ve also found a whopping £400m fund to enable housebuilders to build up to 16,000 new homes. Oh, and not only is he going to splash the cash but he is also going to take less into the Treasury coffers by deferring a 3p rise in fuel duty which was due to be introduced in January.

All good news and with money so cheap at the moment, due to historic low interest rates, now is the time that business should be investing, if only companies could be sure that demand will hold up and also gain access to finance.

Which brings me to the crux of the problem. The elephant in the room this afternoon will be the Euro. Friday’s analyst note from Nomura spoke of ‘probable’ rather than ‘possible’ collapse, the question is when?

The nightmare for George is that all these good intentions are blown away and calculations are declared null and void by a monumental Eurozone default which requires a further bailout of the banks. In a week or a month’s time this Autumn Statement could have all the relevance of a little piece of paper waved around by a former Lord Mayor of Birmingham called Neville Chamberlain in 1939!

Debt crisis solved (hopefully), now deal with the demand crisis please!

Posted in business, economics with tags , , , , , , on October 27, 2011 by Tom Leatherbarrow

European leaders are busy slapping themselves on the back today, but they shouldn’t get too carried away – there is an even bigger job still to be done.

As ever the past can give us a clue to the future. When Franklin Delano Roosevelt FDR) became the 32nd President of the United States at the height of a banking panic in 1932 he dealt with the immediate problems with a torrent of legislation designed to stabilise the situation. The Emergency Banking Act gave banks vital breathing space against foreclosure. The Federal Deposit Insurance Corporation effectively guaranteed all deposits which stopped the run in its tracks. The Glass Steagall Act separated commercial and investment banking thereby controlling the rampant speculation which had undermined efforts to bring America out of the Great Depression.

All of this should sound familiar to European policymakers, but crucially Roosevelt did not stop there. In between his election victory in November 1931 and his inauguration in March 1932 he attended a meeting at the White House with outgoing President Herbert Hoover and the British economist John Maynard Keynes. Hoover talked passionately about why it was not the government’s place to stimulate demand. Keynes retorted with his belief that fiscal and monetary measures can mitigate the adverse effects of economic recessions . The story is that FDR did not understand a word that either said, but he instinctively knew that something had to be done, and if that didn’t work he’d “try something else.”

The result was a monumental kick-start to the American economy. He expanded a Hoover agency, the Reconstruction Finance Corporation, making it a major source of financing for railroads and industry. The National Industrial Recovery Act established rules of operation for all firms to stop cut-throat competition, such as predatory pricing, and also increased wages.

Crucially, the recovery was pursued via pump priming with Federal money. $3.3 billion of spending via the Public Works Administration for example created the largest government-owned industrial enterprise in American history, the Tennessee Valley Authority (TVA), which built dams and power stations, controlled floods, modernised agriculture and homes in the Tennessee Valley. In simple terms, FDR put people back to work and gave them money to spend which in turn created demand.

All of this is very much counter-intuitive. Our instincts in times of financial crisis are to retrench and hoard what we have got. In actual fact we need to be spending and Government has to give the lead, in order to rebuild confidence.

The sense I have is that our policymakers know what has to be done even though it goes against many of their instincts. Our current Chancellor of the Exchequer has talked in vague terms about “big capital projects”. This is going to need more than words though.

For #$%*@’s sake Merv’, lighten up a bit!

Posted in business, economics with tags , , , on October 21, 2011 by Tom Leatherbarrow

The Governor of the Bank of England, Mervyn King, has been a little ray of sunshine recently. Two weeks ago he told us that the current economic crisis was the “worst ever” which is quite something considering what the world went through after the 1930 Crash. Today I notice he is telling us that “time is running out to save the world from economic crisis.”I’ve no doubt that what Merv’ is actually doing is trying to coax Messrs Merkel, Sarkozy and Lagarde to pull their finger out and sort the Eurozone crisis but the message he is sending to the High Street and to business confidence is highly negative.

I am not for a moment suggesting that Merv’ shouldn’t tell it like it is but we must not lose sight of the fact that his opinions can move markets and consumer sentiment. Yes there is a sovereign debt crisis in the Eurozone but we also have a demand crisis at home. In other words business and consumers in the UK are so worried about economic apocalypse that they are holding onto every bit of spare cash they have and not spending.

To be fair, our current Prime Minister tried to talk it up during his speech at the Conservative Party Conference a few weeks ago although his oratory never reached the heights of Franklin Delano Roosevelt’s call to arms during the Great Depression (“we have nothing to fear but fear itself”).

I seriously doubt whether Merv’s new found fondness for a soundbite is helping. At the moment he is talking it down when he needs to be talking it up. His problem is that his every utterance is amplified by the media and the most negative spin possible is put on any economic story.

Take yesterday’s retail sales figures for example which showed an unexpectedly good September for the High Street. The Guardian headline summed up the current problem, “Retail sales bounce in September but summer slowdown alarms experts.”

So come on Merv’ lighten up a bit!