Markets nervy on euro as some eurozone member states hit fiscal unity trouble at home

Unconvinced, with some reason, that the eurozone is not facing up to the immediate debt difficulties facing some key members and ultimately of the eurozone itself, the money markets made their views known yesterday and again today I(14th December 2011).

Yesterday the euro fell to a 9 month low against sterling (£0.84.84p) and an 11 month low against the dollar – $1.30, 6% below its October high.

Today the FTSE finished 2.25 points down, with its equivalents in Germany (the DAX) and France (the CAC) also finishing down.

Italy is paying 6.64% for its borrowing and facing refinancing tens of €billions of debt in early 2012.

Spain’s borrowing costs are closing on the 6% threshold taken as signalling serious trouble.

Factors causing additional concern are:

• German Chancellor, Angela Merkel, has refused to support proposals to bolster the European Stability Mechanism, aka the bail out fund;
• evidence of the start of a run on the banks in Greece – €6.8 billion has been taken out of business and domestic bank accounts in Greece in the last month alone;
• Greece’s Prime Minister has warned that the contraction of the Greek economy is expected to be worse than the current forecast of 5.5% ;
• the French opposition, the Parti Socialiste, looks on course to unseat President Sarkozy in the elections in May 2012 – this could leave France itself unwilling to follow through with the fiscal unity deal Sarkozy has been instrumental in formulating;
• the possibility of a series of downgradings of national credit ratings, following Standard & Poor’s warnings – which now embrace every one of the 17 eurozone countries;
• some eurozone member states and other sympathetic EU states are, as we predicted immediately, facing problems at home convincing their electorates to accept the loss of sovereignty and fiscal independence at the heart of the necessary fiscal unity deal required to save the euro/

Four full members of the eurozone, The Netherlands, Finland, Slovakia and Ireland are experiencing this difficulty, with Ireland looking as if it will have to run a referendum on the matter.

One of the six other EU member states signalling, at last week’s summit, their intent to join the eurozone and a fiscal union – Denmark – again as we predicted, is not finding enough immediate public support for the move.

All three EU member states (but outside the eurozone) who were sympathetic but reserved their positions at the end of the summit – Sweden, the Czech Republic and Hnugary, are facing similar resistance in their own countries.

This is a point in time where major change is well on this side of the horizon.

The possibility of the collapse of the euro – and with it the eurozone and the European Union, is real. It is at a level of possibility where the issue of throwing good money after bad in an attempt to save it has to be on the agenda of every member sate involved.

Every historical movement eventually runs its course because change is endemic to survival and evolution. Resisting it is doing a Canute – or a Cnut.

Whatever happens, European and other economies are facing prolonged difficulties. But an ordered end to the euro would be far less damaging than the disorderly collapse which is quite likely.

However, the eurozone countries are refusing to address either the debt crisis or the weakness of the euro’s prospects for survival – but has addressed itself solely to establishing fiscal union. This is imperative if the euro is to survive but it could go into discussions while the immediate problems are directly confronted.

The markets have now inevitably responded to this indecision and blinkered direction of travel; and their lack of confidence in what is happening will be an accelerant.

We note with some amusement that EU members’ juvenile huffing, sending to Coventry and name calling – all directed at the UK – is being quickly replaced with conciliatory noises, even from France and Germany.

Europe needs the UK, they say – and some are actually being explicit about the nature of that need. They do not want our ideas. They need our money to help prop up the euro to which we do not belong but which does impact on the health of our economy. The UK has already paid £12.6 billion to help with bailing out troubled eurozone economies, from the position of  not being a member.

We reiterate our published interest in the re-energising and extension of the European Free Trade Association (EFTA), particularly with the increasing number of EU member states having trouble with the request to their people to accept membership of the eurozone under fiscal union.

Update 15th December: Ernst & Young are predicting eurozone economic growth of just 0.1% for 2012, with a challenging winter recession. They predict growth to rise to 1.5% – 2% in 2012 but see unemployment levels staying at or above 10% until 2015.