Euroland update 2011

The seemingly endless saga of Greece, Ireland, Portugal, debt and contagion is almost certain to run into a third year. Having initially assured investors that Greece was perfectly capable of supporting a huge and growing deficit, the EU admitted defeat last spring. The wealthy Euroland nations clubbed together to lend Greece even more money. This bailout, the EU insisted, would solve the problem once and for all. It gave the same assurance when it later had to rescue Ireland and Portugal on similar terms. Now, Greece needs to borrow yet more money and Portugal is waiting in the wings for a second handout. This July Eurozone leaders agreed on a new plan that will cover those three, together with any other country which might find difficulty in selling its government bonds to unwary investors (Italy? Spain?). This plan will solve the problem once and for all.

Not surprisingly, investors are sceptical. They have heard it all before. They are also now worried about a totally self-inflicted debt problem with which Washington has saddled itself. The Republican House of Representatives wants to cut public spending. The Democratic Senate and White House want to raise taxes. Withoutan agreement, there will be no sign-off for an increase in the “debt ceiling”, which limits the total amount the government can borrow. Without an increase the government will run out of money. Almost whatever the outcome of the negotiations, global investors’ trust in America and the dollar will have been damaged.

Britain’s economy grew by just 0.2% in the nine months to June. Technically, it amounts to a recovery. Practically, the growth is so minimal that only a statistician would notice it. Interest rates will remain low for an indefinite period.

Three basket cases; three currencies that nobody really wants to buy. It is less a matter of picking a winner than of avoiding the biggest loser. Faites vos jeux!