Once again, ee has taken the words out of my mouth :0) .. "Of course the possibility is a serious one that the Euro project is (and always was!) fatally flawed...and the only solution is one of:
a) full fiscal union (v unlikely)
b) formal defaults by Greece, Italy, Spain etc (also unlikely as Eurozone banks would need to take large haircuts and make substantial provisions - as RBS has already done with Greece, incidentally)
c) dividing the euro into a hard euro and a soft euro....or just chucking out those who don't pass the test. (the trouble with that approach is that markets will continue to pick off the weak until the Eurozone consists of Germany and France ;-))
But Merkel has already indicated she stands behind the euro. But she hasn't understood the scale of commitments that this implies. IMO they have to do a very much larger deal - and, for Merkel, it will probably cost her the next election....but it has to be done".
One thing seems certain: the euro cannot continue as at present indefinitely. The global economy and hence our investments are fundamentally affected by instability in Europe. I was at the first AGM of the JP Morgan Brazil Investment Trust (LSE:JPB) last week and was surprised and interested the learn that Brazil's largest trading partner (for exports) is not the US (9.5%), nor China (15.3%), but the EU (21.5%)!
So ISTM that it would be worth creating a place to discuss this topic.
My own view is that the most likely ultimate outcome is some sort of breakup of the euro, i.e. c) above - or even a complete breakup where each country reverts to their own currency. I take this view because I cannot see the German electorate being prepared to accept a German underwriting of PIIGS debt. Equally I cannot see countries being prepared to accept the loss of sovereignty that full fiscal union implies.
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It may be quite a while before we reach the point where something dramatic and decisive happens. Maybe sticking plasters can continue to be applied for some time to come - maybe not!
A particular aspect of this that I am curious about is the impact on contracts that are written in Euros. There are many types of contract written in Euros. Some that occur to me are:
- Trade contracts between customers and suppliers
- Mortgages, loans and credit card agreements
- Insurance contracts
- Corporate bonds and sovereign debt
The first of these seems relatively straightforward to me, as many contracts can simply be renegotiated. However, this is more complex and troublesome where the subject of the contract is a long-running project of some type. There could be a hiatus whilst the the two parties thrash things out. This takes me back to a conversation I had with HG Capital Trust (LON:HGT) 's manager earlier this year about this topic, as HG Capital is heavily exposed to the Eurozone (but mainly Germany and northern Europe). I imagine that contracts with customers in less indebted and more stable countries can be renegotiated relatively straightforwardly, because the supplier will have confidence in the value of the customer's currency. However, contracts with customers in the PIIGS could be more troublesome. Those customers will want to stick to their own currency at whatever exchange rate prevails when that country decouples from the "old euro", but suppliers will not have confidence in that currency and will either want a more favourable exchange rate (to compensate for the risk which they can then hedge), or for the contract to be rewritten in a more stable currency. It could take rather longer to renegotiate those contracts.
Medium/long term this could be good news for banks, as there'll be more requirement for FX and FX derivatives, between parties that formerly were using the same currency as each other but now cannot.
Thoughts on the practical implications, or if you disagree with my analysis, would be particularly interesting to me.
Regards,
Mark
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62 Comments on this Article show/hide all
In reply to tournesol, post #22
I do not accept that Belgium is some kind of Shangri-La where people live in a heightened state of civilisation compared with the UK. I mean the driving is the worst in Northern Europe for a start. That alone betrays a deep well of agression and homicidal instinct. I make it a policy to get out of the way of any car with Belgian number plates.
T,
All countries have their faults and I have never pretended otherwise. I love many aspects of life in the UK and dislike intensely some others. There are serious problems in the UK with no go areas in most of the big cities, deprivation on a collosal scale in council estates and routine drunken violence every weekend in almost every town in the country.
If you want a nice weekend try a couple of evenings at the weekend in St. Mary St., Cardiff, some day trips to Mayhill/Penlan in Swansea or an evening out in Liverpool 8/Guildhall Square , Portsmouth or go abroad and see the chavs on tour.
Then perhaps you might better understand where I was coming from and see a little bit more balance in what I write.
However it's nice that we agree on something;-)
repo
Given all the criticism Cameron is getting from the likes of the BBC (never impartial when it comes to the EU), Cable, Millitwit and co it is clearly obvious that he has indeed done then right thing.
I've no doubt we will indeed be better off out of the EU (assuming one gets to enter free trade agreements with Eu nations, which was the whole idea in the first place, not the political union it has morphed into). Not only will we safeguard the right to make our own decisions, fish in our own waters unencumbered, but we will no longer have to pay 7.5bn per annum(and rising) to an unelected entity that is so corrupt it hasn't been able to get it's accounts signed off EVER.
It seems even the European people don't want political union, at least 50% of Germans and French don't want it. And we've all seen how other nations feel (the ones that voted No but where then ignored/told to vote again.)
The current moves by Merkozy are nothing more than an audacious power grab.
Why on earth would anyone expect Britain to roll over and take it from the French of all people. Hopefully this is the beginning of the end for the whole United States of Europe. Then perhaps we can ditch all the restrictive legislation that emanates from it that reduces the EU's global competitiveness and get back to the real job in hand -
Namely the fostering of economic growth, job creation, and the paying down of excessive debt.
I find it interesting to look at where we are now compared to the original article in the header.
It seems that the 23(4/5/6?) are proposing to try plan a). Given political constraints, I think Cameron had little realistic choice but to adopt the stance that he did. This may have been a "trap" by Merkozy, designed to designate Cameron/the UK as a whipping boy for failing to allow the fundamental treaty change they desired. However, I also think that this squabble is a sideshow.
Short term, has enough been done to stablise bond markets and allow Eurozone markets to muddle on? Doesn't look like it to me or to John Authers.
Longer term, I'm even less optimistic about the "austerity union", which is what the proposals amount to. I somehow suspect that the electorates of the nations that will come under the cosh don't yet fully appreciate the loss of sovereignty that the proposals (and imposition of "technocrat governments") entail. If the proposals are actually implemented and take effect, I suspect Greek protests may look like a walk in the park, against the social disorder that I fear may follow.
Trouble is, that is an oxymoron. You can't both prioritise debt repayment and economic growth. Prioritising debt repayment will, IMO inevitably lead to a self-defeating downward spiral. Unpalatable as it may seem, hard or soft default (via inflation) is a necessary precondition to restoring economic progress. Yes, once that's done, public spending needs close scrutiny and budgets need to be set accordingly - but counter-cyclical, not pro-cyclical action is what's needed now, until economic growth is firmly embedded.
Unfortunately it appears (though it may turn out only to be an appearance) that Merkozy are determined to follow the Austrian school. Sadly, if they actually do, I fear that I'll be proved right and we'll end up with econonomic collapse and a violent outcome.
Looks like a rough ride, both short- and medium-term to me. :0(
Mark
Hi Mark,
Yes - similar thoughts were occurring to me. I think Cameron has done precisely the right thing - and the Eurozone will simply have to find its own way forward (and they have done very little indeed on that front!)
I thought there was an EXTREMELY good point in the FT today, buried amongst the pile of partizan comments and tough-to-follow eurobabble:
Unless a way is found to bring the UK back into the fold (before the deal is finally signed in the spring), there is a serious problem that most of the EU members appear to consider the Eurozone and the EU itself to amount to much the same thing - and show little evidence of ability to consider the two as distinctly separate. What we effectively now have is a fat Eurozone cuckoo growing in an EU nest - and pushing out everything else in the nest over the side. As Wolfgang Munchau puts it:
Unless there is clear action to reassert the primacy of the EU itself, then I suspect that things could move very fast indeed, with the Eurozone imploding and taking the institutions of the EU with it. In some ways that might be quite good in the long run. The EU has increasingly shown itself to be a bloated bureaucracy, unaccountable and unfit for purpose. It has been a textbook example of financial mismanagement and graft (witness the lack of approved accounts for many years!). If a Eurozone blow-up took the EU institutions with it, then that may not be all a bad thing, because we and others would then have a shared interest in starting once again from the basic raison d'etre ...which is the encouragement of free trade.
The EU itself is in grave danger unless its bureaucrats ruthlessly sever the various ties that bind their operations to the eurozone project. If they don't, then the EU will be deservedly dragged down with the eurozone "Titanic".
I suspect Cameron's decision will come to be looked upon as a crucial turning point in the history of Europe......the moment when the Euro-bureaucrats were forced to face the fact that the game is up for their bloated, interfering gravy-train. It will take some time to play out, of course, and may well mean a great deal of pain for 3-4 years....but I suspect European trade and cooperation as a whole will eventually emerge in a much more sustainable form.
ee
In reply to emptyend, post #26
Agreed ee/marben,
The interesting thing now will be if the EU, inspired by the French, go for imposing the Tobin Tax across whole EU, without the consent of the UK.
Cameron will have no alternative to reject it and call for a referendum on leaving the EU. Then we'll see at least two of the parties do a huge Uturn on bankers' pay and taxes and explain to the electorate why the industry is such an important part of our economy.
Hardnosed business v previous political posturing? There can only be one winner on that one, for any sensible political party, when it's 20% of your economy at stake. If the Tobin tax then goes through and the UK leaves the EU, the UK financial services industry will be set for a boom. The rest can then focus on getting out there and doing business with the younger and more dynamic parts of the world.
Until labour gets in....
repo
In reply to repobear, post #27
That can't happen - and I'm not sure that many commentators have realized that Cameron still has a pretty big stick up his sleeve here. Before going into any meeting, a smart operator should spend a few minutes revising the ground rules.
Whilst many people bleat on about "Brussels-imposed" legislation, very few are informed about how Europe actually works - particularly pre-Lisbon. (And of course, in a society which has broadly Euro-sceptic instincts, it's always handy to have a scapegoat...)
I'll let you do your own research, but suffice to say that the Council is an critically important institution in creating European Law. And when it comes to taxes, this little gem applies:
So Cameron can reject an EU-wide Tobin tax whenever he likes - and doesn't have to leave the EU. It's conceivable he could try and use it to trigger a referundum in the UK - but to do that, he would have to approve the tax first and then go to the country on the basis of powers being passed to Brussels. Which would be an awkward position to put himself into.
My feelings yesterday were that Cameron hadn't really tried hard enough; it was clear that he was between a rock and a hard place and I would have preferred to see him use some smart lobbying and diplomacy to create a solution - even if that was only to create a "coalition of the unwilling."
Having had time to think it through, I now think there is a slim chance that the tides could turn in his favour, but it's going to take a lot of effort and spin. At the moment he is being portrayed as a 'wrecker' by many in my corner of the EU and further vetos risk only creating more ire. However, if he has the foresight and courage to address Europe as a constituency he might just make headway.
I say that, because there is also a second view of Cameron in this corner of the EU. And that is of a PM who, unpalatable as it might have been, had to listen to his electorate. There are quite a few bulletin-board posts asking why politicians in other countries "aren't asking the people."
The question is; has Cameron got the nous, the front and the smarts to address Europeans? He could even pull off something quite extraordinary - if only his party weren't so allergic to E-words.
SW10
In reply to Fangorn, post #24
"Not only will we safeguard the right to make our own decisions, fish in our own waters unencumbered,..."
Of course the Spanish and Portugeuse wanted access to our waters. Why woulden't they. They'd fished out their own.
Access to UK fishing waters was agreed by the Council of Ministers with the full consent of the member for the UK. IMO it was an incredibly crass decision, not just for the UK, but for Europes fish stocks. But it's easier for our government, and the eurosceptics, to blame the EU. In the effort to get distant from unpopular decisions, everything is blamed on 'Brussels'.
In reply to SW10Chap, post #28
I'd agree with that. It isn't all "done and dusted", given that it will take months for the Eurozone countries to finalise the details and sign.
The first poll out after Friday's news shows very substantial (62%) support in the UK for Cameron's position. Equally impressive is the fact that 65% of people think the euro will collapse....and the fact that 70% think that Germany now has too much power in the EU.
As I said previously, I expect Cameron and the UK to be absolutely insistent that EU resources (owned by all the members) are not deployed to sort out the agreement between the 26. Accordingly, I'd expect more fireworks to come if Merkozy continue to treat the EU as being synonymous with eurozone interests. And I'd also expect Cameron to cut any dissenters in his Cabinet off at the knees (perhaps Clarke?).
ee
In reply to marben100, post #3
http://www.eu-oplysningen.dk/euo_en/spsv/all/79/
Very useful link, thank you Marben. Especially the FAQ column on the left.
For me, the most interesting bit is called "How is the EU Budget adopted?"
http://www.eu-oplysningen.dk/euo_en/spsv/all/80/
Having spent a large part of my life in Europe, (and loving it, but not the EU because I do not trust laws which cancel ours, when written by unelected and unsackable bureaucrats).
I am very interested in the levels of corruption over the Euro zone. I know that a part of it has a serious problem, its auditors having refused to sign off its accounts for many years. I hoped the link would tell me more, so I did a word search for "accounts;" but got a nil result. I also checked The entries about the Commission; again no mention of accounts. No surprise there is no mention of "auditors," either. Can anyone show me which organisation has the unsigned accounts?
---ooo000ooo---
Another useful page is; Can a country withdraw from the EU or be thrown out?
http://www.eu-oplysningen.dk/euo_en/spsv/all/20/
The answer is in 5 short lines. "Yes, but only if all member states consent." Some hope of them all agreeing to anything quickly in an emergency!
---ooo000ooo---
Another interesting fact is that the population of the EU is almost 500 million. I cannot conceive how anyone can design such a massive union without including rules for the expulsion of members who have refused to obey the rules. That they can ruin the future prosperity of half a billion people while refusing referendums, is beyond belief. Some hope for a democratic Europe; but the EU is undemocratic.
---ooo000ooo---
My dear and long departed Uncle Gug would love this debate if he was still alive. One of his best comments sums it up beautifully; "The bigger the elephant, the bigger the balls!"
MD.
In reply to MadDutch, post #31
Hi MD,
There is quite a bit on internal audit here: http://ec.europa.eu/dgs/internal_audit/documents-reports/annual-report/index_en.htm
I note that their 2010 report includes this statement (p5):
Cheers,
Mark
http://www.telegraph.co.uk/news/politics/nick-clegg/8949920/Nick-Clegg-attacks-Camerons-EU-treaty-veto-as-bad-for-jobs-and-families.html
On Friday morning the Liberal Democrat leader had declared himself supportive of Mr Cameron’s unexpected decision to veto the treaty because of concerns that it would damage the City. But after two days of Eurosceptic jubilation at the move, Mr Clegg felt unable to resist calls from within his party for him to denounce it.
Remind me not to stand alongside Nick Clegg if we all find ourselves together in the trenches! What a yellow bellied gutless politician of the most obnoxious kind he's turned out to be!
In reply to marben100, post #32
Thanks Mark,
The Commission's statement is pure cobblers therefore I would disregard it. I have been in business in Italy for about 4 years and am fairly fluent in their beautiful language. The Italians would regard such waffle (and not the tasty type either) as a joke.
Have the auditors signed off their approval of the commission's anti fraud conduct and the accounts?
Where can we study this "anti fraud strategy?"
Mike
In reply to MadDutch, post #34
Hi Mike - you may have missed the key point in the passage I quoted:
"The IAS issued an unsatisfactory opinion, on grounds of the lack of an updated anti-fraud strategy for the Commission."
;0)
i.e. they've been working on it for 3 years and still don't have a satisfactory anti-fraud strategy ("To build on its antifraud related audit work carried out since 2007...")
Cheers,
Mark
PS - I'd value your opinion on the DCP thread, if you'd care to pop in there.
In reply to marben100, post #35
European Commission debate on Stockopedia.
Thank you Mark..
"The IAS issued an unsatisfactory opinion, on grounds of the lack of an updated anti-fraud strategy for the Commission."
To sum it up;
- We have organization that wants to take control of the tax income of half a billion people, but;
- It is unable to to submit a verified honest set of accounts.
- It appears unwilling to do anything that might that might convince the half billion it is honest.
I am begging the European Commission to prove this opinion is wrong.
MadDutch
In reply to marben100, post #35
Mark,
If anyone wants an opinion from me, please do not use acronyms; I find remembering names difficult enough, and don't even try to remember what acronyms stand for!
DCP.
Democratic Country of Pongo?
Division of Clinical Psychology (British Psychological Society)?
Disney Consumer Products?
Dual-Core Processor?
Department for Child Protection?
Defence Capability Plan (Australia)?
Dry Chemical Powder (fire extinguisher)?
Data Compression Protocol?
Development Cost Plan (NASA)?
Demolition Control Precinct ?
etc.
http://www.acronymfinder.com/DCP.html lists 152, plus one I invented today.
Mike
In reply to MadDutch, post #37
MadDutch
Hi Mike - isn't Mark talking about Diamond Corp - ticker DCP?
Presumably because you have expertise in the diamond market if I remember correctly?
Only thread I can find which mentions DCP is the following
http://www.stockopedia.co.uk/content/highlights-from-my-portfolio-240211-54351
HTH (hope that helps)
T (Tournesol)
:~)
In reply to davjo, post #33
Clegg is, as usual, in good company - democracy is only useful when it delivers the right results, and if not the people are obviously too stupid for their own good...
http://www.nationalreview.com/corner/285481/round-two-andrew-stuttaford
'Isolation' is nowhere near as bad as the hand-wringers would have you believe...
http://www.nationalreview.com/corner/285351/doughty-little-europe-goes-it-alone-denis-boyles
and
http://www.nationalreview.com/corner/285473/gimcrack-currency-flim-flam-rescue-andrew-stuttaford
That's assuming we really are as isolated as the Eurofrauds are making out...
http://www.nationalreview.com/corner/285498/trapped-merkozy-towers-andrew-stuttaford
Many sensible Europeans, particularly those outside the Franco-German axis, remember that when push comes to shove the British are not fair weather friends, and they may at last hold their political elites to account for being so out of touch with everything except their own self-importance, with the British being held up as the example to follow (perhaps wishful thinking) - in other words, whatever the elites may try, the British will not be isolated from ordinary European people.
For once, Cameron has shown some backbone - I'm just enjoying it whilst it lasts.
isn't Labour's posturing on this whole thing just nauseating?
In reply to tournesol, post #38
T,
Thank you for the help, and especially for translating HTH into English!
I will do my best to help with Diamondcorp.
Mike
In reply to SW10Chap, post #28
Excuse me for quoting my own post, however Gavin Hewitt of the BBC makes a similar point today:
The whole article is well worth reading; I think he comes up with some very sensible analysis of the current situation (describing Greece as an EU protectorate in all but name, considering the need for growth and glancing at the emerging powers) . He looks at the wider picture and - I have to say - I'm inclined to agree with pretty much all of his points: http://www.bbc.co.uk/news/world-europe-16136004
SW10