The End of the Eurozone? - 07/12/2011
Once again we feel that it is necessary to contact all of our clients to talk about the global economic situation.
While suggestions of a global economic apocalypse are wildly premature, we, like most commentators, continue to be shocked by the inability of our political masters to deal with a crisis which has been clearly signposted for some time.
What is happening at present is due to two key factors. The first of these is the inherent paradox at the heart of the Eurozone, namely the fact that there is currency union, but each member is responsible for its own debt. Whereas in the past a country could restructure its debt by devaluing its currency and stimulating growth, this is no longer possible. As a result, indebted nations face increasing costs to borrow money to service their existing debts, which continue to grow.
The second factor is much more straightforward, and can be summed up in two words, political inertia. Meeting after meeting, conference after conference have produced no lasting solution to the problem, and what action has been agreed has generally been too little, too late.
Currently we have a variety of solutions being bandied about. Bailouts have been the order of the day but obviously treat the symptoms rather than the cause, and are merely a Bandaid applied to a gaping wound. The European Central Bank has been proposed as a "lender of last resort", but this would mean wholesale printing of money with its inevitable inflationary and devaluing effects.
At the moment the Germans, in the form of Angela Merkel, are calling the shots, and we may be about to enter a decisive phase, as even they are starting to feel the effects of the crisis. Until now the German attitude has been that everyone will simply have to take the pain until the inefficient Mediterranean economies can balance their budgets, but this may be changing as the effects of the crisis start to be felt at home.
Eurobonds, in other words the pooling of debt so that it is issued by the Eurozone as a unit rather than individual countries, is now back on the agenda, despite German opposition and this may be the solution, but only if the Eurozone moves towards closer fiscal union, and the Mediterranean countries are still pressurized to reform their economies, rather than simply returning to their old ways of overspending on the basis that someone else will foot the bill.
Clearly something radical has to happen or the Eurozone will start to disintegrate, and that requires national interests to be subverted to Pan European needs but whether there is the political stomach for that is a key question.
Whatever happens we see markets as being highly volatile for some time yet. For younger investors this should not be too much of an issue, but for those relying on their pensions and investments it is clearly more of a concern.
If you are in the latter category and you wish to discuss your situation in more detail please don’t hesitate to ring or email me.
