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What Next For The Euro?

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The Eurozone is in no position to support Italy as it struggles to deal with its debt mountain. The European Central Bank has been buying up Italian bonds in an effort to stabilise the market but, as was once famously said “you can’t buck the market” – yields have continued to rise and the 7% barrier was breached yesterday. Italy has over 300Bn Euros of maturing debt to roll over in the next year. It is going to be expensive at best and impossible at worst – there is a real risk of default.

The value Euro of the Euro has been holding up well which will be unwelcome news for the PIIGS economies. The ECB interest rate is 1.25% compared to 0.5% for UK base rate.

The ECB could adopt a programme of quantitative easing, printing money, which would offer some help to the weaker economies in the Eurozone. Germany vetoed that on the grounds that it would be inflationary. That tight monetary policy may suit the German economy but it adds to the problems of Greece, Italy and other economies which are left with nothing in their arsenals to deal with the debt crisis other than further austerity measures which are unpopular and will suppress growth.

The obvious tensions between the stronger and weaker economies are now exposed as never before: the break up of the Eurozone is a realistic possibility. It is hard to see how it can continue in its present form. Nor is the solution for Germany to use its position of strength to dictate fiscal policy to others. Yes, centralisation of fiscal policy is a necessary step if the Euro is to function. But if Germany is intent on saving the Euro, perhaps it needs to consider that the fiscal policy needs to take some account of the needs of others rather than reflecting the needs of the strong German economy.

Markets: As the Italian crisis looms, it may have been expected that there would have been significant falls in equity markets. Falls in Asia overnight were followed in Europe in early trading but, at the time of writing, those early losses have been reversed and at the time of writing the major Eurozone markets are back in positive territory.