These are interesting times in the Eurozone. Every day brings a fresh development. With each twist and turn the markets react.
When the idea of a single European currency was first mooted there were those who thought that the inability to use fiscal levers across all states would prove problematic. Those that were very much for the currency were aware that this was likely, but still favoured the project as a means of encouraging a tighter political union.
To say that the Eurozone is in crisis is not over stating matters. At the heart of the problem is the simple fact that countries such as Greece and Italy are not in the same place economically as Germany, but that they are bound together with the same currency.
Huge and unsustainable levels of debt from the weaker countries in the Eurozone have led to bailout after bailout. This situation put Greece and Italy so comprehensively into hock that something really remarkable was allowed to happen.
Ancient Athens may have been the birthplace of Democracy, but there is little on show there today. The Greek Prime Minister has effectively deposed, replaced by an unelected ‘technocrat’ – a stooge for the European Central Bank.
Italy has also seemingly abandoned representative democracy. The ever ‘colourful’ Silvio Burlesconi being forced from office in favour of technocracy.
The markets were calmed somewhat by the end of democracy in Greece and Italy. How long this situation can continue nobody knows. Already in Greece comparisons between the controlling attitudes of the Germans and what happened during the war are being made.
Were Greece and Italy have already gone, how far behind can Portugal and Spain be? Speculation over Spain’s ability to service its debt has caused multiple spasms of panic through the bond market. The election of a new right wing government in Spain has helped to mollify the markets.
Spain’s will not have an easy time in government though, with one of the main factors in ousting the previous regime being dissatisfaction over cuts, the austerity measures that they have promised may end up being met with widespread unrest and industrial action. At the same time enough must be done to satisfy Europe’s paymasters to keep the technocrats waiting in the wings from taking centre stage.
The future of the Euro is itself in doubt. The breaking up of the Eurozone would have been unthinkable 12 months ago, but it is now being discussed. The way it would happen would probably be for Germany and some of the other wealthy countries to split into a different currency.
German chancellor Angela Merkel has publicly stated that Germany is totally invested in the future of the Euro. Keeping the wheel from falling of the Eurozone will involve giving huge amounts of money away tot he troubled southern European members. This could prove to be very difficult to manage politically.
None of this turmoil and uncertainty is helping the grim European earnings outlook. The financial sector in particular has slumped. One chink of light seems to be the technology sector, as well as consumer cyclicals which have been able to buck the trend.
According to an analysis published by a well known private bank, profit margins in the European financial sector are at their lowest ebb since the 2008 credit crisis. Earnings in this sector haven’t returned to that nadir however.
Where the Eurozone will go (and it will take the British economy with it), nobody knows. Hold onto your hats, its going to be one hell of a rollercoaster ride over the next few months.