There’s a risk the euro could split into at least two denominations
Britain – the whole of the country – is suffering from bi-polar disorder. For those who dislike medical terminology, I mean to say that we Brits – just about everyone I meet – are a nation of basket cases.
For a start, there’s the joy and despair of the England football team in the omnipresent World Cup. The English are, pretty much down to the last man, boy and ladette, invested in the success of the national team. If the boys win, we’re happy. If not, it’s difficult to get out of bed in the morning. The Scots and, to a lesser extent, the Welsh have similar vehemence about the outcome of this great global event. If England lose, so much the better for many of them. Tesco, until recently, was selling ABE flags and pendants in its Scottish stores. ABE stands for “Anyone But England”.
So by the time you’re reading this England may or may not have played its game against Germany in the round of the last sixteen teams. But win or lose, the nation will be sharply divided between ecstatic highs and desperate lows.
You could say pretty much the same for the markets over here. We’re looking with a mixture of gloom and feverish hope at the recent UK Budget. It’s clearly one of the most sensible things to emerge from a British administration in years, but the mess the expenditure cuts are deployed to deal with is so nasty and so disorderly it would be foolish to expect too much.
One unequivocal bright spot is the re-emergence of the exceptional financier Amanda Staveley. Ms Stavely, still in her thirties, is the leading light at PCP Capital Partners, and has put together some remarkable deals, mainly for Gulf-state clients. The acquisition of Manchester City, and most importantly the restructuring of the share register of Barclays Bank at the height of the post-Lehman Brothers banking scare, are outstanding landmark events. Ms Staveley has been instrumental in the Qatari acquisition of Harrods, and has now emerged from the shadows to call the bottom of the UK commercial property cycle.
Obama’s ‘xenophobic’ posturing
Meanwhile, there are further signs that, talented orator though he may be, President Obama just isn’t up to the job. After his – in my opinion xenophobic – posturing over the BP oil crisis in the Gulf of Mexico, come two more disasters.
At present, President Obama is revealing himself as the last Keynsian still surviving on the world stage. As the leaders of the G8 and G20 major economies meet in Toronto, they are being subjected to some sever finger-wagging from the US authorities. The US is concerned, apparently, that if Europe rids itself of its tendency to spend money it doesn’t have, then the US economy will suffer. Oh, the irony. That such a message should emanate from the world’s leading exponent of isolationism and protectionism is savagely, sardonically amusing. Europe, led by Germany (which is sick of picking up the tab for the likes of Greece and Portugal) will resist this argument, I predict. The US administration and its leader have diminishing authority and impact on the world stage.
And it’s not just me. Poor old General McChrystal certainly felt that the politicians didn’t know what they were doing with regards to the wars in Iraq and Afghanistan. His infamous coverage by Rolling Stone magazine (infamous in that the reaction has been extraordinary) has resulted in his dismissal.
Mounting debt, falling euro
One of the reasons that the Europeans will not yield to the demands to keep printing and spending money is the ongoing crisis that is the euro. The British pound – not that sterling is a hugely significant measure of very much, I admit – has hit a high of more than 19 months. Traders attributed the down trend in the euro to mounting concerns about, erm, mounting debt.
Some say that the UK is set to raise interest rates, and this may have been a factor too. But overall, it’s not so much a question of the British pound rising as the euro plummeting. The US dollar has gained more than 18 per cent against the euro since the start of the year. The pound has traded at around the 1.50 level against the greenback during this period – so the move is all euro weakness.
Well, folks, I have to tell you I did say as much at the beginning of the year. Spot the crisis, and sell, sell, sell.
I have to say that I see things getting worse for the European currency before they get better. We have a full-blown catastrophe on our hands this autumn. The cracks are already appearing – the markets favour “northern” euro securities over “souther” securities denominated in the same currency. The risk is that the currency will split into, at least, two – or maybe even atomise into scores of different denominations.
We’ve seen this before, in situations of political turmoil. When the Soviet Bloc countries were rudderless following the collapse of Communism and the demise of the Soviet Union in the late 1980s and early 1990s, banks in countries such as Hungary and Poland issued promissory notes in dollars instead of bonds denominated in their own currencies. Some even backed the notes with assets rather than currency of any sort. Thus they re-invented commodity-backed notes – a new currency. If things go badly wrong, this will happen all over again in Europe.
At the very least, I expect to see a two-tier system of some sort develop with the European Union. The simple fact is that the political will of the bureaucrats to create a unified Europe was way ahead of the actual political facts – Europe is a mosaic of different cultures and countries, not a homogenised blend. If Paris and Berlin could tell Athens what to do, then fine, the austerity packages would work. But they can’t, so it won’t. The cracks in the euro will widen and deepen.