Confirmation on Monday that Greek Prime Minister George Papandreou would stand down had brought about a wave of relief but last evening’s announcement from Rome that embattled Italian Prime Minister Silvio Berlusconi would also stand down soon brought absolute joy! Take care though and mindful of the countless number of Italian prime ministers and governments that have popped up since the end of the second world war and that just as Berlusconi has done, many other former Italian government leaders such as Amintore Fanfani, Aldo Moro, Giulio Andreotti, Romano Prodi bounced back to second and third terms! Few are yet prepared to speculate what happens next in either Italy or Greece but fewer still believe that either resignation changes much in terms of how markets will see events unfolding form now. But to see the back of Mr. Berlusconi yet again certainly does justify more than a degree of cheer. How amazing it was to see the US market yesterday dancing not just to the tunes of Euroland but predominantly during the day almost solely to tunes emanating from Italy. The world it seems has been turned on its head. Loathed though Mr. Berlusconi has been by some over the years and long ago having seemingly used up all of his nine lives years it might just be a touch premature to write Mr. Berlusconi completely off just yet. After all, boomerangs have a rather nasty habit of bouncing back!
As I had suggested on Monday events that would likely unfold this week have marked it out as a potential turning point for events in both Euroland and the European Union. It is almost as if the remaining sap has all but dripped out of Euroland and that the will to succeed has now been destroyed. I hope not but fostered by the inability of Germany to recognise the fatherly role that it must play if the Euro is to be salvaged plus wistful dreams of France that continue to believe the sovereign debt issue is only solvable when full economic and political union can be established within the European Union [what bunkum this is!] it seems to me that a solution to Europe’s woes are as far away as ever.
With French presidential elections due next year I suppose that we can at this stage anticipate the demise of Nicholas Sarkozy and a year later one suspects we might also be waving au revoir to Angela Merkel or should I better say Saludar or Auf Wiedersehen! Experienced heads falling off the plate but will those that replace them have any better ideas? Though politically astute Germany’s leader Angela Merkel might yet end up being remembered as the woman who signed the final death warrant for the euro. Indeed she may even be remembered as the woman who also unwittingly marked out the beginning of the end for the EU. Arrogance once again is letting Germany down as it so often has in the past.
With America and the rest of the world watching in horror as day by day seemingly lacking a sustainable solution European leaders wallow in Brussels and other corners waiting and hoping for that a few crumbs of comfort might emerge the pressure on them is now relentless. Increasingly the view in the west is that we are edging closer to a euro break up by the day. Sixty five years ago when the founding fathers gave birth to the dream of a United States of Europe I doubt that they would have believed that caused through a failure to police member economies, poor discipline, too fast enlargement and the rush to spawn a Europe wide currency too soon that it might come to this.
Of course they might yet get through the problem – they might yet print all the new money that they need. Inflation may go through the roof but they will probably say that is a small price to pay. You never know China might yet come to the rescue along with heaven only knows who else. Maybe but maybe not! More likely is that if the mature section of Euroland is to survive intact and assuming that the EU manages to hold itself together intact that this will force all of us to contract. Daily we hear talk about incentivising growth but while some talk the word recession and double dip. Few though talk economic contraction lasting five or more likely, ten years as the sentence that we will all need to pay for the failings of the Euroland economy. Of course walking away from the problem is not on the menu and neither should be burying heads in the sand. No-one is really doing that despite much comment to the contrary but neither are Europe’s leaders providing sufficient for those that write this stuff to believe they are doing nearly enough. To resolve what has been laid out in front of us we need the euro to remain intact and we probably need to EU to remain at one with itself as well. You have heard it one and you have heard it a thousand times but what follows from here on must be an orderly transition.
In the meantime while it may sound good for some to hear talk about the restoration of the individual historic currencies but to achieve this in under two or three years is far easier said than done. Whatever transpires, the piles of euro debt will remain. I doubt that Italy will implode but there is little doubt that how markets react to the Italian situation from this point on will decide the fate of the euro and European Union. Spain can do little more than look nervously on as it awaits a similar fate should the pack of cards finally come down. I am no great fan of the euro and neither am I of the EU. But I do say this to the multitudes of euro sceptics – be careful what you wish for and remember that if the great European dream falls alongside the euro European politics may never again be the same. That the probable sentence for the whole of Europe be the various nation states involved in or out of the euro, in or out of the European Union and maybe even including the four EFTA member countries as well will be a period of economic contraction is all but writ in stone. With debt on the scale we are talking artificially incentivising economies to grow is hardly a runner. Keynes ideas are hardly practicable but then neither are those of the monetarist theorists.
Howard Wheeldon is the Senior Strategist at BGC Partners