Sarkozy exit threat to UK economy

Posted on: 08 May 2012 by Anthony Page

Just when you thought your pension and retirement income was secure ... the eurozone heads back into crisis mode.

Eurozone threat to UK economyNicola Sarkozy has gone, Greece is without a government, David Cameron is licking his wounds, Vladimir Putin is returned to the presidency of Russia and Angela Merkel, Chancellor of Germany, is quietly fuming in Berlin

Europe is about to go through turmoil again as France tries to renegotiate the deal done with Germany to support the Euro. Greece, when it gets a government, could very well leave the single currency or at least try to change the deal they just agreed to fund their enormous debt. Add to this the Dutch who have yet to appoint a new government, the picture in Europe looks pretty bleak.

It is almost a certainty that the Sterling will strengthen against the dollar and the Euro and make our exports more expensive and less competitive – and in turn, increase the time to our recovery. If the rows in the Eurozone continue, the money markets will look to make profits by speculating against the single currency, with France as well as Greece becoming targets. This may well take the pressure off Spain and Italy, but it will mean that the pound will attract more investment pushing it even higher upwards.

Against this backdrop David Cameron has got to pull rabbits out of the hat to try and give us voters what the local elections have told him we want – a change of policy and a ‘softening’ of the budget cuts. It may well be that the play against the Euro will give him some room for manoeuvre and he may be able to ease the tightening knot around our wallets. Sadly it will not be enough to make any real difference – the consumer spending shift we need is too big to make any significant change on the economy. The simple truth is people just do not have any free money to spend – it doesn’t matter if they are feeling confident or not. 

Add to all this the cuts in central and local government spending that have still to take effect – there are three more years of cuts and job losses to come and these will slow us yet again. The only real option for Cameron is to tweak taxes and make us all feel a bit better and then start borrowing more money and initiate some big infrastructure spend plans to create jobs. The areas he will look will be building projects for schools, social housing, roads and transport. If he does this the money markets will support him so long as the pound stays strong – in fact, they will be keen to invest as Sterling is now one of the safest currencies to hold.

The main problem for Cameron is that Ed Miliband and Ed Balls will sit opposite him in the Commons and say ‘We told you so!’ It will be a humiliating day for Cameron but maybe he will have to do it just to kick us out of the stagnation we find ourselves in. All things being equal the Budget cuts the Tories put in place should have worked and got us going again but sadly no one accounted for the dithering among Eurozone countries as they tried to sort it out. 

Cameron has limited choices so may just have to make concessions but it is going to weaken him and his coalition. It may just cost him the next election and all through no fault of his own. 

The next few months will see the doldrums return to Europe before spreading out to the wider world, and with no end to the uncertainty in sight, you can bet it is going to be a very ride bumpy indeed. 

For us oldies in the UK (or anywhere else come to think about it!) the advice is stay economical and try and see the brighter side of life – we are going to need our sense of humour over the next eight months. Still we have the Jubilee and the Olympics to look forward to – that’s more that most countries have got!

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