EU officials and lobbyists might lose their summer holidays as new treaty details are negotiated
I feel immensely uneasy. President Obama and the Republican Congress are playing chicken with the debt ceiling where the US will go into technical default if the ceiling is not raised by August 2nd. European politicians are failing either to restructure the Euro or come up with a political framework which will save it, though they are meeting in an emergency summit this Thursday.
You may think that a Test Match at Lords on Thursday is a welcome distraction, particularly the 2,000th ever Test match, and the 100th between England and India, two of the world’s top 3 cricketing nations, but stock price movements are larger than usual on important Test match days, when the markets are thinner. And August is coming up when again markets are thin and perturbations have exaggerated effects. There is a history of crises starting in August like the 2007 financial crisis and the 1998 Russian default, not to mention the most famous August crisis which became the First World War.
The signals seem to be building up for some kind of market crash – shares and many bonds are already down significantly from their recent peaks. Asian investors, who are the key players in many markets and who have a culture of more heavy handed government control of economic variables than is common in the West, simply cannot believe the way that both American and European politicians are treating their deficits as a political bargaining chips and are shocked and frustrated.
The real fear is that the main economic weapons were used up to deal with the last crisis. There is little more scope (though some may yet have to be found) for expansionary fiscal policy; no scope for reducing interest rates and printing money is regarded with scepticism, though it may yet prove the only option. Meanwhile, as the stress tests on the European banks have revealed, the financial system is by no means restored to health and is in no position to suffer a serious body blow.
We have constantly warned that the recovery from the 2009 recession would be slow and bumpy and other independent commentators, though not yet many official views, seem to be catching up with us. But even we are now worried that the outcome could be worse than that if the politicians continue to play games. A third of UK CFOs now believe that there will be a double dip. At the beginning of this year we gave one in five odds on a UK double dip. The chances now are about one in three.
The good news is that the unknowns are ‘known unknowns’ in the Rumsfeldian sense. These normally do not trigger crashes because they are always at least partly priced in.
But even the best outcome looks to me to mean that a lot of people are going to lose their summer holidays as they struggle to put flesh on the bones of agreements reached by politicians in the next fortnight. A European solution will mean a new treaty to be presented to the Council which is currently scheduled for mid October but which will surely have to be brought forward.
I also suspect that in David Cameron’s weakened position, he will find it difficult to resist the pressure from his backbenchers for the UK to take advantage of the unanimity requirement for a new treaty by using it to renegotiate the UK’s links with the rest of the EU. And this could make the coalition unviable which could lead to an early election.
So a lot could happen in the next few weeks….
Regions: UK, Eurozone, North America
Topics: public finances, economic growth, public policy