Posts Tagged ‘eurozone’

Sunday review: The election of Francois Hollande

13/05/2012, 07:00:53 AM

by Anthony Painter

Last Sunday, France elected a technocratic centrist. He tips slightly to the left of the centrist band but not far. He’ll shift the debate at the EU level about emphasising growth but expect incremental rather than seismic change. He’s really just a French version of Mario Monti only with a democratic mandate. The problem is that it is not at all clear that is who the French thought they were electing. They think they voted against austerity but they did anything but.

Hollande’s election slogan was ‘le change, c’est maintenant.’ More accurately, it will largely be a case of plus ça change, plus c’est la même chose – domestically at least. Hollande’s fiscal consolidation plans track Sarkozy’s for the first year then deviate slightly, returning the French budget to fiscal balance a year later. The major flaw in his economic programme is the lack of any determination to reform France’s labour markets. It has some of the heaviest regulation and highest unit costs in the EU. The best performers in Europe on unemployment are those with moderate regulation (lightly regulated countries such as the UK perform less well than the moderate group). France’s regulation is a drag on growth and employment – as is that of Spain – but these are structural concerns whereas there is an immediate issue with demand.

Overall though, his plans are largely sensible. He plans to cut small business tax, enable the state to employ the young unemployed and create a national investment bank. He intends to decentralise the French state. Any European moderate will be completely relaxed about all of this – indeed, they would applaud it. The problem was not in the programme, it was in the rhetoric. On Sunday, Hollande declared:

“In all the capitals… there are people who, thanks to us, are hoping, are looking to us, and want to reject austerity.”

The simple fact is that austerity has become defined in a very broad manner across the EU. It now basically means public spending cuts and tax increases. The bar is set very low and this narrows room for political manoeuvre. Europe’s voters (including in the UK) are being told by political leaders on the left that the choice is either growth or austerity. Would you like to chew on mud or munch a tarte tatin? I’ll have the tarte tatin please.

The problem is that, unfortunately, in this convulsive and volatile world, someone has sprinkled the tarte tatin with mud. And we’re very hungry. What to do?


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Apres le deluge – the political fall-out from the eurozone debacle

07/10/2011, 07:30:41 AM

by Atul Hatwal

It’s coming. Don’t say you weren’t warned. Peter Watt and Rob Marchant among others have been ringing the bell, but the gaze of Britain’s political class has been elsewhere.

Theresa May’s turn at Tory conference, as Mrs Slocombe, commanded more attention than the looming cataclysm. And now the shadow cabinet reshuffle is occupying Labour thoughts.

But as the eurozone ministers inch towards action, the shaking earth cannot be ignored for much longer.

In all of the furore around this rolling crisis, reams of newsprint have been written on the economics of the impending eurozone crash, but comparatively little on its political consequnces.

Yet it’s the political fall-out of this economic disaster which will utterly change Britain’s future.

Because after the eurozone finance ministers are finally driven to act, and the necessary billions are committed to securing eurozone, there will be a new European settlement.

The cost of Germany and France putting up the funds to save the euro will be pooled economic sovereignty in the eurozone, or more specifically a European bloc of 17 nations, where monetary and fiscal policy is run by the Franco-German alliance.

This will recast Europe and with it Britain’s economic prospects and security in three ways.

First, Britain will be vulnerable to increased eurozone protectionism, second the UK’s position as the preferred location for foreign direct investment in Europe will be threatened and third, Britain’s international defence commitments will likely need to be redrawn.

Protectionist voices have long been a central part of French economic policy.

Two years ago, the Sarkozy government received a formal slap on the wrist from the commission when one of its more hapless trade ministers admitted that Renault had shifted production of a model from Slovenia to France, in return for billions of euros of soft loans.


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Osborne and Cameron’s eurozone delusion – the contagion is airborne and the UK is getting sicker

08/08/2011, 11:55:34 AM

George Osborne and David Cameron are deluded.

There’s a long list of topics to which that statement might apply, but right now, one is more important than the rest – contagion from the eurozone crisis.

Contagion normally refers to the transmission of eurozone woes to Britain via UK banks’ liabilities in the crisis areas. The greater the exposure, the worse the contagion.

This conventional view of contagion is based on direct contact between banks and infected areas. That’s how the Treasury looks at it and why the government thinks the UK is insulated. Last week George Osborne boasted that the UK was a “safe haven”. Then on Friday, William Hague declared “We’re not in the firing line”.

But what the Bullingdon boys haven’t understood is that the contagion is airborne.

A cursory look at movements in banks’ share prices shows how limited direct eurozone liabilities have translated into plunging prices.

Recent estimates of the exposure of UK banks to public and private debt in the trouble spots were £82.5bn for Ireland, £65.4bn for Spain, £40.5bn for Italy, £14.8bn for Portugal and £8.6bn for Greece.

These might seem like big figures, but for a sector as large as UK banking, worth £7000bn, they are worrying but hardly critical. The latest IMF healthcheck on the UK assessed banks’ exposure as “manageable”

In comparison, since the start of this financial year, the big banks’ share prices have plummeted – RBS has fallen 31%, Lloyds has fallen 46% and Barclays has fallen 35%. Only HSBC has been somewhat insulated, but even they have dropped 14%.

The reason for the collapse is that negative city sentiment has been turned into self-fulfilling fact by the stampede of the hedge fund herd.  The link to liabilities no longer needs to be real, it just has to exist in the fevered minds of city traders.

The result of this shift in transmission mechanism for contagion is that the economy is in far greater danger than the government understand or at least is letting on.

If the trend in bank share prices established since April continues, RBS and Lloyds will return to the level where the government had to intervene back in 2008, by Christmas.

Speak to any trader or analyst about what they think will happen if there is a crisis event in the eurozone, like a default, and they are all agreed: there will be a run on the banks similar to the crash of 2008.

The only thing they view with equal certainty is that there will be a defining crisis at some point.

Estimates on the scale of the carnage vary, but in this situation a single day’s losses across the banks would likely top one third of share value.

Anything on this scale, following on from the last few months will potentially send the most vulnerable – RBS, Barclays and Lloyds -into freefall. Sentiment is already too negative and the share prices already so low that one big shock could tip them over the edge.

That would bring Hobson’s choice for the government – bailout mark two accompanied by a massive rise in the deficit and a potential UK sovereign debt crisis or the collapse of some of the UK’s biggest banks.

Take your pick. Either way, we would be in the same position as Portugal, Ireland, Greece, Spain and Italy. No credit, no confidence, no money and too much debt.

The crisis would have been fully transmitted from the eurozone to the UK.

As Osborne and Cameron phone in government from their holidays, they are content in their contagion delusion. But the reality is that the UK is no more insulated from the impact of a eurozone crisis than the French were protected by the Maginot line at the start of World War 2.

Their criticism of Gordon Brown was that he failed to fix the roof when the sun was shining. There’s some truth in that.

Now, on their watch, it’s been raining for months, the water has soaked into the timbers of the house and the eaves are bowing. But still there is no action.

If and when the roof crashes in, they and they alone will be to blame.

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Friday News Review

05/08/2011, 06:18:45 AM

World markets in turmoil

Markets around the world have tumbled as fresh fears over the eurozone and US debt grip investors. America’s Dow Jones index closed down more than 4%, while the Asian markets also suffered massive losses on Friday. Japan’s Nikkei 225 index lost 3.4%, South Korea 4.2%, and Australia tumbled 2.4%. Almost £50bn was wiped off the value of the FTSE on Thursday, with the listing for the UK’s top 100 companies closing at 5393, down 191 points or 3.43%, taking £49.8bn from its value. It is the biggest fall on the FTSE for more than two years. Since last Friday morning, £124.97bn, or 8.17%, has been wiped off the value of the FTSE 100. – Sky News

Eurozone countries are failing to stop the “contagion” of the debt crisis, the President of the European Commission warned yesterday. José Manuel Barroso’s warning came as stock markets plunged around the world amid growing fears of another global recession. Mr Barroso called for an emergency strengthening of Europe’s bail-out mechanism. He said he had “deep concerns” about the faltering Spanish and Italian economies. The stark message was delivered as the FTSE 100 suffered a 3.43pc fall, its biggest since the height of the banking crisis in March 2009. In the past five days, investors have lost a total of £125bn. The doubts spread to America as the Dow Jones Industrial Average fell 4.3pc to its lowest point since December 1 2008. – Daily Telegraph

Lib Dems: ‘decriminalise all drugs’

Liberal Democrats are expected to call for an independent inquiry into the decriminalisation of possession of all drugs. A motion to be put at the party’s annual conference next month is likely to be passed, officials said. It would be the first government-sponsored inquiry into decriminalisation, but is unlikely to have the support of David Cameron who has hardened his approach to drugs after being a past advocate of more liberal legislation as a member of the home affairs select committee. Ministerial sources point out that the government published a review of drugs strategy in 2010 and does not yet see any need for a rethink. Senior Liberal Democrats believe Cameron and the home secretary, Theresa May, could be persuaded to hold an open-minded inquiry into a controversy which divides public, political and medical opinion. The inquiry, the Liberal Democrats said, would look at reforms in Portugal which are said to have reduced problematic drug use through decriminalisation for personal use and investing in treatment centres. – the Guardian

The Liberal democrats are to call for the decriminalisation of all drugs, including heroin and cocaine, to be considered urgently by the Coalition Government in an effort to cut levels of addiction. The party’s conference is preparing to back demands for Britain’s “harmful” and “ineffective” drug laws dating back 40 years to be swept away and replaced with an entirely new strategy for tackling drug use. Nick Clegg, the Deputy Prime Minister, who has previously supported drug decriminalisation, is understood to be relaxed about his party committing itself to such a contentious policy proposal. But it would be bound to provoke tensions with the party’s Conservative coalition partners, who strongly oppose reform of drugs laws. – the Independent

The coalition’s new 45p tax rate

David Cameron and George Osborne are considering emergency plans to slash the top rate of income tax from 50p to 45p in the pound, according to reports. However, Downing Street and the Treasury last night both strongly denied the claims. But the idea added to growing speculation about how the Government planned to improve sluggish growth figures. Any such plan would cause major friction with the Tories’ Liberal Democrat partners and be seen as a direct challenge to Business Secretary Vince Cable. Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, has already dismissed the idea of cutting the 50p rate as “in cloud cuckoo land”. But it was suggested that cutting the top rate to 45p would cost the Chancellor no more than £750 million a year. Treasury analysis shows that Labour’s decision to raise the rate to 50p for those earning £150,000 a year or more has generated up to £2.4 billion a year. – Daily Telegraph

Councils told to sell the family silver

Town halls are being urged to sell billions of pounds’ worth of assets – including clubs, sports stadiums and bingo halls – to protect front-line services. Communities Secretary Eric Pickles has asked councils to take a ‘good hard look’ at their extensive land and property portfolios in order to save taxpayers money. His department has located 180,000 assets, worth an estimated £385billion, owned by 600 public bodies – including 87 councils. Researchers found that these organisations own or lease properties to six horse-riding stables, more than 20 sports grounds, dozens of hotels and theatres, about 100 golf courses and a similar number of pubs. Mr Pickles has estimated that selling off some of these assets, or using them more efficiently, could save the taxpayer as much as £35billion over ten years. – Daily Mail

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Let’s capitalise on Tory twitching on the economy

13/06/2011, 01:00:05 PM

by Jonathan Todd

Public debt, said to be the consequence of Labour largesse, is the problem for the governing parties, and aggressive cutting the medicine. Labour contends that this remedy is too tough to close the deficit. As we recover from a global shock of 1929 proportions, slower cuts are required for strong enough growth to generate the tax revenues needed to achieve deficit closure. Lack of growth, as well as the deficit, is the problem targeted by Labour.

Are these well-established positions shifting?

Not as far as Labour is concerned. Some twitching can, however, be detected on the government side.

First, John Redwood wants an improved growth strategy. This is echoed by Liberal Democrat Mark Littlewood. This doesn’t mean the Tories and Liberal Democrats are about to concede, as Labour has protested, that they have no growth strategy. Since the formation of the government they have argued that the deficit needs to be addressed to retain the favour of bond markets and so control upward pressure on interest rates. They prefer this monetary stimulus to greater fiscal support. Yet the comments of Redwood and Littlewood are not insignificant. They acknowledge that the resources of the shrunken state could better target growth.


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