So has the European economic outlook improved by “sacking” the UK?

The UK / Rest of Europe split has had most of the headlines since Friday, but as we said yesterday, the most important issues are really still the outlook for the Euro and critically, the European economies. So how have the announcements made changed those prospects?

Not a lot, in our view. Let’s look at what wasn’t in the announcements. There is no shared debt issuance; no fiscal transfers from rich to poor countries to help them dig themselves out of the hole of debt, a shrinking economy and public disaffection; no clear statement of how the European Central Bank is going to support the process, and no plan to stimulate growth.

What we have is a vague idea that countries will get their budgets approved by the Commission and that they’ll be subject to sanctions or fines if they don’t stick to them. But this is pretty much what was supposedly in place before – and it didn’t work.

In my local paper the other week, some homeless alcoholic was up in court for shoplifting a couple of bottles of cheap vodka from a convenience store.  The judge indicated that he would normally have issued a fine, but he said, “there is no prospect of the defendant paying even a small amount per week, so it seems pointless – he has no money”.

So if Greece fails to hit the 3% annual deficit target – and they may have tried hard, or they may not – what does the European Court do? Fine then a few billion Euros? But they haven’t got any money! That’s why they’re there in the first place! It is crazy.

It appears to be the worst of both worlds. There is no real additional central power in this new process – so if Germany actually took over economic management of Greece, as they did with East Germany after re-unification, and agreed some transfer of wealth as part of that, then we might see some change. But that’s not happening. However, there is enough central interference to provide a lightning conductor for ill-feeling at national level if things get worse. And Greece (and other countries) are still stuck with a huge debt, a currency that they can’t devalue by the 30% they probably need, and a cost structure that makes them unattractive on the global market.

So – personal view of course, and I’m not an economist – I don’t see that anything has changed positively for Europe in terms of economic outlook. I wouldn’t lend my money to most of the southern countries; I suspect it won’t be long until we’re back in crisis territory, and the falling out between the UK and the rest might seem a very minor issue again by this time next year.

Watch the head of the largest bond trader in the world, Pimco, Mohamed El-Erian, here (18 minutes into this video) on BBC Newsnight – I thought he was very impressive and clear in his analysis (unlike the woman from the European Central Bank). “This is neither a quick fix, nor is it a comprehensive fix so we remain on the sideline in terms of engaging in the bond markets of the most vulnerable European economies...” 

There is another view though.  Contrarian and controversial commentator Max Keiser, the only man who predicted the Icelandic banking crash, thinks the UK has had it and Frankfurt will take over from London as the major financial centre in Europe within a few years. He puts a lot of store in the fact that Germany has greater gold reserves than the UK or the USA, and sees this as critical as the world financial system collapses.

So what’s our advice? Don’t bet the mortgage on anything at the moment, but organisations shouldn’t put those contingency plans (for countries leaving the Euro and / or major European turmoil) on ice just yet.

Voices (2)

  1. huhh?:

    I think we’ve all had it. Chap from UBS or Credit Suisse has said: “It’s time to start investing in small calibre weapons and tinned foods…”

  2. Gail Pyrah:

    Your analysis makes perfect sense to me Peter and mirrors much of my own thinking. If only the politicians, not just in the UK but in the rest of Europe, would stop trying to score points off each other and instead focus on what’s really important, then we might just begin to see a light at the end of this very long, dark tunnel! And finally, I do hope that Max Keiser has got it wrong this time!

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