In London, the restaurants and shops still appear to be busy and it’s just as difficult as always to get a taxi. To some, it may not feel like we are close to another economic crisis, but in Europe the storm clouds are darkening by the day.
Back in 2008, when the credit crunch led to a major global slowdown, there was a sense that Governments needed to rescue us from disaster – the only question was how quickly the politicians could organise themselves and settle market nerves. Fortunately, a number of interventions helped us to recover from the brink.
But Europe has continued to be a source of major concern, emanating from a lack of growth, especially in the periphery. The dominoes have been falling, almost in slow motion – Greece, Ireland, Portugal, Italy, Spain and now France. Gradually the markets have lost confidence in the prospects for growth and the ability of governments to meet their fiscal plans and so bond yields have started to rise significantly. So now in 2011, the saviours of the markets in 2008 look incapable of repeating the trick.
At the core, we still have Germany which enjoys a ten-year interest rate of 1.9% but the Bundesbank has just revised down its 2012 growth forecast to below 1%. Unfortunately, Merkel refuses to support the only real solution to this crisis – the European Central Bank declaring itself a buyer of last resort of EU sovereign debt. Had this policy been adopted six months ago, the situation would not now be as serious, but in the interim, the markets have had plenty of time to think about worst case scenarios and price them in, leading to a downward spiral of confidence.
A fire has been raging for some months but instead of calling the emergency services, Europe has tried to put out the flames with a bucket and a hose. Now a fire engine may not be enough.
Germany has to make a choice – whether to engage fully in supporting its neighbours or stand back and let the whole system unravel, leading to a major economic slowdown for the whole region. Unfortunately, that political choice has a significant impact on where markets go and so trying to position a portfolio to cater for such binary outcomes is extremely difficult. No wonder investors are desperately searching for safe havens.
