Speaking yesterday, president of the European Commission Jose Manuel Barroso said Europe had reached its political limit in terms of how far it can go with austerity-led policies because of the growing opposition in the eurozone’s recession-hit periphery.
Bond manager Bill Gross, meanwhile, told the Financial Times he believed the only way to produce growth was to spend money.
Economics, not physics
John McNeill, investment manager at Kames Capital, said: “Of course, whatever course of action is taken, we can’t be certain of the outcome and that is why there is no easy solution.
“Public spending for the sake of it has little value; this is something we saw in Japan, where there was significant public work undertaken over years, but a lot of it was very wasteful and there were literally bridges to nowhere built.
“There is a case for increasing public spending in the UK, for example, and social housing and infrastructure could be improved considerably. But the danger is that the decision is made based on current figures and then borrowing costs increase, sending interest rates higher.”
In it together
The difficulty in the current situation is that what makes sense for one country doesn’t necessarily make sense for the global economy.
McNeill said: “The developed markets are over indebted, they have high deficits, and they need countries elsewhere to increase spending. But those who arguably are in a position to do so, such as Germany, are unwilling.
“The UK took the appropriate action when its fiscal deficit hit record highs, and acted to try and rectify it as soon as possible. But trading partners were much weaker than expected, which of course impacted on the effectiveness of the policies. “
Another barrier, certainly in the UK is that of politics rather than economics. The coalition has committed itself to an austerity-led budget and politically it will be very difficult for them to veer from this.
Plan A with a diversion
The economy has endured a severe blow, and the depth and breadth of the calamity is such that it is going to take a long time to rebalance.
“The key really, is to establish a level of capital spending that will be economically viable. There needs to be more co-ordination between monetary and fiscal policies, borrowing needs to be made more readily available, and people need to be more willing to borrow.
“This would of course be a Plan B. But it will be politically difficult to admit to this. Perhaps what we need is ‘Plan A with a diversion’," McNeill concluded.
How have things changed since February? Neil Williams, fund manager at Hermes, reflects on whether or not the eurozone is on the mend.
