Death knell for the Euro?
LONDON -- As every day goes by, Greece, the birthplace of democracy, looks more likely to exit the eurozone. The country’s voters rejected the strict austerity programme recommended by their European masters.
But the turbulence has spread with the French people having kicked out Nicolas Sarkozy and replaced him with his Socialist rival, Francois Hollande. Hollande promises massive new state spending to reinvigorate the economy even though this flies in the face of the austerity pact championed by Germany’s Angela Merkel. The mood in Paris this week was reflected perhaps by the weather that drenched the new President as he brought the city to a standstill as he paraded along the Champs Elyse.
Meanwhile, the Spanish government has been forced to bail out the troubled lending giant Bankia, sending tremors though the stock market. All this probably sounds very familiar. For more than four years, the headlines have been full of doom and gloom, with the sorry saga of the euro usually at their heart. But the truth is that Europe is approaching the crunch. And in their very different ways, the Greek and French people may have pronounced the death knell for the Euro economic regime.
The Greek economy, even after months of bad news show figures that are genuinely shocking. Under the latest austerity regime, imposed by the EU and the International Monetary Fund in a desperate attempt to slash Greece’s gigantic deficit, unemployment has now hit 22 percent. Among school leavers it is 54 per cent. In the past four years, the Greek economy has shrunk by 20 per cent. Little wonder that so many Greeks, bruised and battered by austerity, have turned to extremist parties, making it impossible to assemble a democratic coalition to run the country. The most likely outcome is that eventually, despite a new election, Greece will end up with an unelected technocratic regime that effectively does the bidding of Brussels and the IMF. The problem, though, is that this would almost certainly provoke bloody street protests, as well as giving an even bigger boost to the parties of the far-Left and ultra-nationalist Right. Whether there is any point persisting with the EU’s austerity plan though, is another matter. Many observers now believe that Greece has no choice but to abandon the euro, devalue its new currency and start again. A Greek exit would send shock-waves through the eurozone.
Mr Hollande intends to kick-start the French economy and boost new jobs. He has promised to hire 60,000 new teachers, create 150,000 new public sector jobs, bring the retirement age down to 60 and to take on the ‘financial elite’ he blames for the crisis. Unfortunately, it is not obvious where the money is going to come from considering that the French economy is in a pretty poor state. In any case, if he sticks to his spending promises, he risks alienating the markets, smashing the European fiscal pact and breaking the alliance with Mrs Merkel. What’s more, there is no guarantee that France will escape the European contagion.
Portugal is in a terrible mess. After a €78 billion bailout last year, Lisbon slashed welfare spending, cut public sector pay and put up taxes. The government has even abolished four public holidays in a desperate attempt to boost economic activity. But it is the situation in Spain that is most worrying. Unemployment stands at more than 24 per cent, while half of all under-25s are out of work. The country’s banks are sitting on €184 billion of bad debts, equivalent to more than 17 per cent of Spanish GDP, which they ran up during the disastrous construction boom before 2007. Many experts fear a catastrophic wave of bank losses, sending the Spanish cap-in-hand to the IMF. Ireland, Greece and Portugal have already been down that road.
But Spain is a different matter. As the fourth biggest economy in the eurozone, Spain accounts for almost nine per cent of European GDP. A Spanish meltdown would hit many British businesses hard. From airports and airlines to banks, construction firms and travel companies. From Britain’s point of view, our future isn’t really in our own hands, but may be decided on the streets of Athens and in the government committee rooms of Berlin. Despite this Mr Cameron still has to prepare a potential strategy should the eurozone fall to pieces.
Many believe he should be lobbying Berlin to allow an orderly, managed retreat from the euro, which might give countries like Greece more chance to recover. Even so, the Prime Minister can do little as we all watch the death agonies of the euro.
On a slightly brighter note, in the UK we are now looking forward to glorious weather, the Queens Jubilee and the Olympics. Every cloud…………..
Steve Jacobs is Northern Europe and Italy Director at Imperius Asset Management.