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Cloud with a silver lining

The Greeks live to fight another day – for the time being, at any rate. How many days that might turn out to be the case is far from certain. The measures that have been demanded by the bail out cash providers will hardly find favour with the Greek electorate, already up in arms over the effects of earlier austerity packages. At the very least, the next few weeks will keep markets on their toes.

In a way it is remarkable that the discomfiture being felt by one of the smaller eurozone members is having the effect it is. Three countries are presently in the intensive care unit administered by the International Monetary Fund and the European Central Bank – Greece, Ireland and Portugal. Together, they account for around 4 per cent of European gross domestic product. Yet a default by any one of these nations threatens the very existence of the euro.

When this single currency was in the process of being introduced, the head of Lombard Street Research was Professor Tim Congdon. A noted Euro-sceptic, he had been a special adviser to Conservative Chancellors of the Exchequer and was vocal in his opinion that the euro would not happen. When it did launch, his tack changed to stating it would not work. He could still be proved right.

But the economically stronger Northern European countries that are founder members of this club seem determined to keep the eurozone intact, even if it means forcing the Greek economy further downhill. This is the dilemma faced. The austerity measures will do little to restore the health of Greece’s failing economy, which contracted by 5 per cent on an annualised basis in the first quarter of this year.

There are those that believe the Greeks deserve all that is coming to them. The launch of the euro demanded a degree of economic co-operation and fiscal prudence from all the participating nations that had never before been attempted. We now know that Greece bent those rules more than a little. Aside from some no doubt expensively acquired financial engineering to conceal the extent of their borrowing, their record on tax collection and the generous provision of certain social services does not stand much scrutiny.

And here’s the rub. European nations are, by and large, over-indebted, with demographic pressures that are forcing a rethink on the funding of many of the social benefits we have all come to accept as our right. Emerging nations have none of this baggage. Social provision might be aspirational there but they will be learning from the muddle being created in those wealthy countries which delivered so many benefits on a pay as you go basis.

So the fact that attention is focused on contagion, with Italy in the firing line for a potential debt downgrade and Spain teetering on the brink of recession, rather takes the eye off the main problem faced by the West. The boom years should have been used to pay down debt and create proper funding arrangements for the many benefits we presently receive. They weren’t. Instead, governments used cheap money to bolster economies already under threat from countries with cheaper labour and a stronger work ethic.

Meanwhile, those nations with a stronger economy, such as Germany, seem determined to keep the euro on the road. Their electorates seem less committed, but it is fair to say that a default would probably cause more problems than it would solve. This cloud looks likely to hang over European shares for some little while. The good news is that it may well throw up some cheap buying opportunities as a consequence.

Brian Tora is an associate with investment managers, JM Finn & Co



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