…Until, after a series of unfortunate economic mishaps, mismanagement and general tomfoolery, disaster struck and the magic well did run dry. The kingdom’s elders: Bashful, Doc, Dopey, Grumpy, Happy and Sneezy all took to a crisis meeting before Rumpelstiltskin lost patience with Sleepy and threatened to banish him from the kingdom altogether. Their only hope it seemed would be for the frog to play nicely but, despite many many kisses from beautiful maidens, he never turned into a prince after all and so he too had to go. What a kefuffle!
Ok, so the eurozone story was never set up for a fairy tale ending, but oh my let’s hope we get some kind of resolution this side of Christmas, otherwise Santa’s sack may end up a little lighter this year. The news today that the EU has cut 2012 growth forecasts for the eurozone from 1.8% down to 0.5% will come as a shock to nobody, nor will the weakening of the euro.
A ray of optimism
However, the bounce in the markets this morning gives us some hope, and despite the gloom, the experts I have spoken to in recent days all share the same optimism that some kind of compromise will come and we’ll somehow “muddle through”.
“Despite the ongoing state of crisis in the eurozone, we believe that when all is resolved, it will be a stronger union as a result,” says Tom Higgins, global macroeconomic strategist at Standish.
“There are also going to be plenty of disagreements, but the key factor is that it is in no one’s interest for the eurozone to fall apart.”
Still looking for a cause for cheer? Well how about the change in leadership of the European Central Bank (ECB)?
Adds Higgins: “The new president of the ECB, Mario Draghi, took over from Jean-Claude Trichet last week, and we have already seen a cut in interest rates along with a ramping up of the ECB’s purchase of Italian sovereign debt. Draghi already seems to be more flexible in his approach to the crisis than his predecessor, which should be cause for optimism.”
ECB intervention
The ECB it seems has slipped into something of a fairy godmother role. Eric Chaney, chief economist at AXA Group, is not alone in thinking that is only a matter of time until the body intervenes in the secondary sovereign debt market at a much larger scale that it has thus far.
“We believe that the ECB will bring down short term interest rates close to zero in a first stage and will then have to undertake both credit and quantitative easing in order to prevent a contraction of credit and money supply,” he says.
“Provided that the ECB steps in on time and that euro area governments take the right decisions regarding their domestic economies and the governance of the euro area, the worst, i.e. a disorderly break-up of the euro area should be avoided, and European economies should recover in the latter part of 2012, thus rejoining the global recovery and boosting the attractiveness of risky assets.”
Could it be a happy ending for equity investors after all? It’s hard to say until decisive policy action is taken, and for every winner hunting a profit, there’s always another unfortunate soul losing out – in this case the hard times ahead for the Greek and Italian people is not in doubt. But just like those familiar fairy tales of yore, morality is only half the story.
