Posted by Tim on 11th December 2011
Some of you living abroad may have heard confused rumours of cataclysm in the Eurozone, that the UK is leaving the EU, or that David Cameron has left us marginalised and out in the cold. Certainly a meeting in Brussels last Friday will have momentous consequences, although it’s too early to tell whether Cameron is Neville Chamberlain or Margaret Thatcher. This week we will look at the Eurozone crisis and why it has arisen.
The Eurozone consists of 17 EU member countries who share a common currency, the unimaginatively-named Euro (€). The UK is not one of them. The new currency was introduced in 2002 in an attempt to bind Europe even closer together. However the inventors of this plan overlooked the obvious fact that serious stresses would appear in the system if there were a) no common fiscal policy and b) no strong central government able to implement said fiscal policy. This left a situation where many of the Eurozone countries are able to run their economies in ways which actually result in economic divergence. This problem was not immediately apparent as the economic growth of the last decade obscured it.
However the crisis in the finance industry has led to liquidity problems in several governments, with many having to pay increasingly impractical rates of interest to borrow money. So they are slashing spending, which leads to domestic discontent and higher unemployment, thereby reducing government revenues and increasing the need for borrowing. These countries include the relatively minor economies of Ireland, Portugal, and (most notoriously) Greece, though Spain and Italy are also under pressure. In the past, these countries would have devalued their currencies, and we’d all have gone there for cheap holidays, bought their cheap exports, and everything would get right in a few years.
The Euro prevents that happening, so these governments have to be given huge handouts. The only Europeans with enough money to do this are the Germans and (paradoxically) the UK, which finds itself forced to help the Euro out as the Eurozone is our major trading partner and Euro-chaos affects our exports. But Germany is picking up the bulk of the bill and is getting increasingly annoyed about it.
So the Germans are trying to fix the problem. They argue that they are not going to keep pouring money into a bottomless pit, and are particularly aggravated about having to bail out the Greeks, who retire earlier, pay less tax, and (allegedly) don’t work as hard as the Germans. So heads of government spent the last week in Brussels discussing a new European treaty which would enforce some Germanic discipline in governance, and resolve the problem. Part of these deals would mean more regulation on financial institutions. David Cameron had already made it clear that the UK will cede no more sovereign power to the EU, and insisted that an exemption for UK financial institutions was his price for agreeing to the changes.
Europe said non. Instead they made a separate deal to strengthen the Eurozone, with only the UK left out. Some argue that Cameron has stood up for the UK, others that he has betrayed us. The word being used a lot is isolated – some argue that by taking no further part in the discussions, the UK will have no say on important issues that will affect us. Others claim that we are now effectively isolated from a coming Euro-disaster.
It is too early to tell whether Cameron’s action is heroic or suicidal, but one indicator is that the Standard & Poor’s credit rating agency last week threatened to downgrade the credit ratings of all the Eurozone countries. This means that S&P thinks that they are less able to pay their debts, and their cost of borrowing will go up. The UK however, continues to maintain its coveted AAA rating. Which means that the UK government can borrow money at the cheapest rate for decades. It could be a good time to invest in sterling.