Global slow down – means what for GBP?
Whilst shaving this morning some of the headlines which were rolling off the Radio were ‘the end of the world’, ‘dangerous times’, ‘a return to military rule’ and finally my favourite ‘apocalyptic’, which in its very meaning suggests the end of the World, or at least an imminent disaster. So you can imagine my relief when I left my flat door for my walk to work to see that no one had told Glasgow that the world was about to end. Everything seemed to be progressing as per normal, apart from the fact it wasn’t raining.
The Global community is in danger of a financial collapse, but if we consider that most of the problems are from a complete lack of confidence in the Euro zone, there are still options available. Firstly, a managed Greek default, where an agreement is reached with private bond holders on the amount of debt which they are willing to write off. If reports are to be believed this morning, this is an option that the Greek finance minister is currently looking at with a 50% hair cut being mentioned in Greek news paper. The problem with this option is that it could lead to panic and stress on other indebted euro zone nations.
The Second option is to break up the Euro and return to monetary policy at the national level. This would allow Italy, Greece and Spain to start the printing presses in order to pay off their huge debts and devalue their currency to a level where their exports are once again competitive. The problem with this option is that it would lead to hyper inflation in Italy, Spain, Portugal and Greece. However, over time these nations would be allowed to recover on their own terms.
These are both measures of last resort, but the longer the Euro zone leaders argue between themselves, without any long term plan for a closer knit monetary union, then the more likely these options become. Having said this, to talk about the end of the World before all options have been explored seems premature. Let’s hope the fact that German and French PMI industrial production started to show contraction in Q3, when the flash estimates were announced yesterday, could be the key to pushing them towards action to save the single currency.