Austerity is something we have come to hear a great deal about over the term of the global downturn and in particular in relation to the debt crisis in Europe.
Those holding the purse strings in Northern Europe are used to austerity as a tool that has been frequently used, in varying degrees, to manage their economies.
Those in Southern Europe, the so-called PIIGS, have not used austerity to manage their economies as they have been used to high interest rate, high inflation policies where when the worst came to the worst they de-valued their currencies and exported their way back to life.
Now with debt levels that can almost certainly never be repaid, bailouts unemployment and social strife on the increase, those Countries are being forced to “tighten their belts” even further.
This seems a very good time to be in opposition in the debtor countries. It is clear that the Government will have to agree to virtually any policy that is put forward by the Eurozone but the opposition can disagree without having to propose an alternative.
Such a situation will come about again today in Greece.
European Leaders have a conference call this morning, (obviously flying everyone to meet in person is not good P.A.) when the next steps for Greece will be discussed. Meantime further austerity (that word again) will be discussed in Athens with the opposition (no surprise) totally against any further measures.
It is almost impossible to imagine a scenario now where Greece can stay in the single currency without some serious back-peddling from their partners. Frau. Merkel says she wants Greece to stay in the single currency. Of course she does. The former CEO of Deutsche Bank reckons the cost of a Greek exit (I hate the term Grexit!) will cost several hundred billion Euros. That is without mentioning any potential knock-on effects with other countries following Greece through the exit.
All they want to do is cut Greek debt from 144% of GDP to 120% by 2020. Sounds simple? Patently isn’t!
The Euro is beginning to trade in ever narrower ranges, which usually means a violent breakout is coming. Technically it looks like the break will be higher but fundamentally it looks lower. Faced with such a paradox traders should become more like Eurozone leaders and ask for more time!