The UK has not signed up to the European single currency. But any thought that our being outside the Eurozone somehow insulates us from what goes on inside was thrown into sharp focus this afternoon as the FTSE closed down 3.43% to record its lowest level for almost a year. The Dax was down a similar amount: so much for being in London rather than Frankfurt am Main.
What set the bears off was a letter from European Commission head Juan Manuel Barroso warning that the sovereign debt crisis was no longer something happening only in Athens, Dublin and Lisbon. This may be related to the discovery that Italy’s stock of debt may need some rather meaty amounts of refinancing in the next two years, and that Spain has had to sign up to high interest rates on its latest deal.
In particular, there is less confidence – yes, it’s the C word again – in Italy’s Government and particularly the leadership ability of “Duce” Berlusconi, who is rapidly being seen as an even greater figure of fun than previously. But he does not appear to be ready to step down any time soon. Put simply, the money markets do not believe that investing in Italy is as safe as, say, Germany.
So what of the strength of the Euro itself? Well, at 1800 hours, one Pound Sterling bought just EUR 1.15 – the same rate as last November. It’s not exactly in a state of collapse. So why all the panic? Well, the European Central Bank (ECB) is by nature a very conservative beast, and this has been rewarded with the confidence of those same money markets.
Thus the paradox: the Euro is considered sound, while some of the countries that use it are not. The ECB has been buying Irish and Portuguese debt today – whether at 100 cents on the Euro is not known – but has said it has no plans to go further, which will once more retain the confidence of the money markets, while – you guessed it – putting pressure on the likes of Italy and Spain.
As I’ve said several times before, the ECB needs to move faster – and it could probably manage to be a little less risk-averse without alienating the markets. Although the nation states need to prove their commitment to the single currency, the ECB also needs to show that it is committed to making that currency work, and work for the whole of the Eurozone.
I’ll check back on this one later.