Eurozone peril

The Eurozone economy has ground to a halt as figures released today show it has stagnated in the last few months of 2009.

The collective economy of the 16 nations using the euro currency making up the Eurozone has grown by a mere 0.1% while the situation has been further exacerbated by the state of Greece’s debt-laden economy and surprise news that the German economy, the largest within the European Union, has faltered.

The value of the euro has fallen by 1% against the dollar and by 0.25% against the pound, making the euro now only worth 82 pence.

Neil MacKinnon, Global Strategist for investment company VTB Capital, explained the situation as being one of “worries over sovereign debt,” especially with regard to Greece, but also with other Mediterranean countries such as Portugal, Spain and Italy. There are further fears concerning the reduction of their budget deficits and debt GDP levels, with some cases “a major worry for investors recently”.

Mr MacKinnon speculated the recent surge in market confusion probably stemmed from the lack of clarity given at yesterday’s EU summit meeting, where it was indicated there may be some plan to prevent Greece from defaulting, but without any conclusions actually being reached.  As the United Kingdom is not part of the Eurozone it would not necessarily be involved in any sort of bailout plan, but a weak Eurozone economy would be detrimental to its trade.

The solution required to get the Eurozone markets back on track according to Mr Mackinnon is “fairly draconian cuts in public spending alongside tax increases” for the countries involved, but he adds “there is a high degree of scepticism about governments, like Greece’s for example, in being able or even willing to implement the required reductions,” citing the fact that previously such measures resulted in social and political unrest. Increasing such measures in Greece could easily trigger further protests, strikes and riots among its citizens.

Meanwhile Germany, with the largest Eurozone economy, also risks angering its tax payers who are concerned they may end up paying a large portion of any bailout plan aimed at saving Greece. But while the populist German newspaper the Bild says Germany would rather go back to their old currency the Deutschmark than bailout Greece, no political leader has taken this line and Mr MacKinnon believes it is unlikely to happen:

“If we did see a scenario where Germany just refused to provide any support, I think it would just escalate the volatility we’re seeing in the financial markets, it would certainly create a very difficult situation and create contagion in the Eurozone area,” he said. “Endgame could well be a default where countries don’t comply with the budget regulation and end up leaving the Eurozone all together…you might easily envisage a scenario that the monetary union simply breaks up.”

Mr MacKinnon stressed these were extreme scenarios. He expects the EU’s reluctance to let the International Monetary Fund take the lead and a willingness to make the Eurozone appear strong will result in an even closer scrutiny of Greece and a bailout plan “with strings attached” eventually being produced.

 

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