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NEWS | 2011 | The Euro - A Winter Of Discontent?
The Euro - A Winter Of Discontent?

12 December 2011

The Euro – A Winter Of Discontent?

Concerted action by the world’s central banks to stand behind the European Central Bank (ECB), may be construed as necessary panic planning to buy time for the eurozone to put into place the austerity packages that will provide the only really effective cure to its financial malaise.

This is an international game being played with the highest stakes; a form of three dimensional financial chess with the key players encompassing the world.

In Germany, Angela Merkel’s stubborn reticence to pump German wealth into the eurozone support fund hides a subliminal message that, until those countries that are out of financial control regain some stability, Germany, an economy currently growing at around 3%, having benefitted from a strong manufacturing boom and being financially stable, is going to remain intransigent. The meeting last week between Sarkozy and Merkel evidenced this, and sets the scene for a battle of wills between weak and strong nations.

The latest EU summit may be another step forward towards greater integration, despite the lack of agreement by the UK, but there is a long road ahead. China has long postured that the West must sort out its own problems, but behind the scenes, China is becoming increasingly worried about the risk of recession in the West, as this would severely dent its own export growth at a time when the Chinese economy has also slowed dramatically. China has an unwritten pact with its people’s communism, which embraces capitalism in order to deliver its social agenda.

Now the Americans, who have been sitting on the side-lines, have joined the fray, with their own central bank uniting with the world central bankers to lend support.

In such difficult times, democracy itself is being side-lined; a necessary pragmatism to deliver the medicine that an electorate can never be persuaded to take in the time available: Italy has an unelected government; Belgium has no government; and the Greek government is being ‘advised’ by an international team of technocrats to ‘help’ the Greeks develop and implement more robust fiscal systems.

The world is, quite literally, holding its breath against a backdrop of enormous angst that the failure to resolve the euro’s problems would trigger a full-blown recession.

On a positive note, there remains enormous potential for growth globally, driven by the emerging markets which account for roughly half of all world trade and goods; most companies, particularly the large and mega-cap businesses, continue to trade profitably and benefit from strong balance sheets and substantial cash reserves. There is enormous self-interest all around the world to successfully manage this very difficult situation, and last week’s intervention by the world’s central bankers may well prove to be a key first step on the road to recovery.

Article by Bob Woods