Andrew Morris, managing director, Signature

Comment: How the Eurozone crisis threatens the UK

Andrew Morris (pictured), managing director of Signature, the arm of Rowan Dartington dedicated to supporting investment professionals and their clients, comments on the Eurozone crisis and the threat it poses to the UK…

Is it true that the UK is seen a “safe haven” as George Osborne claims? Or is it merely not quite as shambolic as Eurozone?
 
In the current environment there are few places that can be termed genuine safe havens. Currency movements are a measure of confidence in an economy.  Of the major currencies, the pound is the second worst performing currency after the USD over the last 12 months, with the Swiss Franc seen as one most favoured. Only in the last two weeks has the EUR:GBP showed signs of being impacted by the crisis. The GBP has only just bounced off a near two year low!
 
So the message is, one of a clear and present danger?
 
Certainly in relative terms the UK position would appear to be comparatively better than that of the Eurozone. How much George Osborne can say this is due to his spending cuts are somewhat debatable, and the UK position relative to the Eurozone is clearly assisted by having autonomous monetary policy alongside our own currency. Figures released yesterday serve as a reminder that UK finances are far from being a garden of roses, and we face very real challenges here not least as a consequence of further signs of slowing in our own economy, indeed we may even see a contraction in UK third quarter GDP.
 
It is worth noting, that the full impact of the budget cuts announced to date are forecast to only start to address the deficit from 2015. Any weakening of the economy/shortfall in revenues could make this an even more painful ride. However the “floating” pound is likely to be a plus for us as it is able to create export opportunities and an economic stimulus for UK businesses. The members of the Euro do not have this benefit – yet

Why has the crisis now spread to Italy? How great a threat is it to Spain?
 
Italy is the third largest bond market in the world, so the implications of them taking the same road as Portugal,Ireland and Greece would be a game changer. So although the challenges facing Spain in the near term are great, the implications of a downgrading of Italian debt would be more far reaching to the EU and the ECB. The sudden attention with which it now finds itself can be mainly attributed to domestic political issues and the lack of progress in implementing its own austerity programme; it also badly requires domestic reforms to its own economy. The ‘fundamentals’ at present do not on their own warrant a sudden and pronounced expansion in Italian bond yields. However with continued inaction on the part of Eurozone policy makers and by extension their failure to address the contagion issue has led to the natural reaction of a nervous market. 
 
How great a threat does the Eurozone crisis pose to the UK, and potentially taxpayers?
 
It poses a significant and growing threat to the UK, not necessarily directly to UK tax payers, in the form of direct hand-outs to the Eurozone per se. In the short term the most damaging aspect of a deterioration in the situation would be felt via our banking sector, which arguably would not be able to cope with the fall out – it has exposure of potentially EUR700bn. We should also remember that the Euro zone is our largest trading partner (50% + of our trade) and any upheaval in the Eurozone economy would be felt in our economy.
 
George Osborne claims that “decisive action” needs to be taken in the Eurozone. Why have current efforts failed?
 
Quite simply because there is no easy solution to this, in addition there are 17 different countries each pursuing their own agenda with their own interests and their own domestic politics. This coupled with the fact that there are also intra governmental institutions which can’t agree, for example the European Central Bank’s continued objection to selective defaults shows the extent of the challenge faced. Current efforts have failed because they don’t acknowledge the nub of the problem which is one of solvency, and sticking plasters over these gaping and growing wounds may hold things together in the short term but they are not a long term solution. He is right in arguing for decisive action, indeed the emergence of Italy as a problem country is a reflection of the collective inaction which has prevailed, and we can reasonably expect that other countries will be drawn in.

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