Head over heels

As UK holiday makers began to think about a wet summer in the Lake District to avoid trading on weak Sterling, 2009 looks to be shaping up far worse for the mainland

The simple fact is, the Euro is way too high.


The ECB cut Eurozone interest rates by half a percentage point to two percent on Thursday, signaling that problems ahead may be greater than envisaged in December.

Although rates have now been reduced four times since September from 4.25 percent, what is significant is that they’re still above virtually every other leading economy, including the UK (1.5 percent) and America (between zero and 0.25 percent).


EU Commission President Jose Manuel Barroso warned Parliament on Wednesday that it should approve a proposed stimulus program to ease the crisis. "Things are bad and are likely to get worse before becoming better," he said.

Part of Europe’s problem is an apparent conflict over the best solution to avoid long lasting recession. The German government, in charge of the EU's largest economy, has been reluctant to pursue the more aggressive Keynesian tactics adopted by the UK, which involves facilitating more spending and borrowing. 
Keynesian tactics allow governments to either supply more money, or commission the purchase of goods and services to help cure recession or depression. This conflicts with the laissez-fair capitalism favoured by the Germans which limits the role of the state in the economic lives of individuals. 
The problem right now is no one knows for sure how the Eurozone’s economy is doing. This means that deciding which plan to pursue is in itself fraught with risk.


We know this: unemployment is rising and several nations are already in recession, including the Germany.


The IMF reported on Wednesday that the continent's advanced economies were all in recession, and several of the region's fast-growing emerging economies required financial assistance.


In the span of a few months, the IMF has approved emergency loans for Hungary and Latvia and there are reports of other European countries coming to the Fund.
On Wednesday, Standard & Poor's placed ratings for Spain, Portugal and Ireland under review with the potential for downgrades, while Greece's credit rating was cut. 
Barroso insists EU governments should push through a European Commission program to spend €200bn to ease the burden.


The IMF has until now advocated fiscal restraint in all of its loan programs in Europe. But Marek Belka, who took over the IMF's European Department in November, said recently that fiscal stimulus was fine where countries could afford a larger budget deficit. 
“Some of Europe's emerging economies probably can afford some degree of fiscal stimulus and we are certainly not recommending fiscal austerity in every case,” he added.


Germany too is weakening. On Monday its government agreed to a €50bn spending plan. The detail includes €17-18bn investments in roads and schools, and €9bn in tax cuts.


Gordon Brown heaped praise on the Germans on Thursday, insisting the rescue plan was ‘a model for others’.


But the Euro is still weakening. Keep an eye on those southern EU states over the coming weeks.