The eurozone debt crisis is on the brink of spreading to the bloc’s core members, according to economists at Schroders.
Alan Brown, chief investment officer at the asset manager, says the eurozone members “don’t have a whole lot of time left” before the market starts to act in earnest on fears that the crisis is affecting countries other than Greece, Ireland, Italy, Portugal and Spain.
France is a good example of where this is happening, he claims. French sovereign and corporate bonds have recently increased after investors started to worry that the country is building up an unsustainable level of debt.
Brown warns that the eurozone is likely to be hit by significant capital flight as investors seek safer havens. When this occurs, the region will face a credit crunch that could hasten its return to recession.
“Markets are now capable of creating the realities we’re trying to avoid,” he comments, saying current low levels of business investment and restrained confidence stem from the markets’ reaction to the debt crisis.
Keith Wade, chief economist at Schroders, says some recent economic data suggests a credit crunch has already started in the eurozone. European banks are reluctant to lend to each other, he notes, while claiming the present situation resembles that of 2008 in some ways.
Both commentators say the markets are unlikely to respond favourably to the eurozone until substantial efforts are launched to tackle the debt crisis.
Wade argues that the key is for Germany to end its opposition to the European Central Bank embarking on quantitative easing as this would help to support much-needed growth, while Brown warns that any solution is likely to emerge at the last possible moment.
Wade also claims it is “quite remarkable” that some suggest the UK should consider entering the eurozone and predicts that the region’s troubles will be enough to push the UK into recession next year despite the lack of monetary union.
Brown adds that without tighter fiscal union the eurozone remains susceptible to shocks, strengthening the case against the UK’s entry. Even with fiscal union, he continues, the country should reluctant to tie its sovereignty to the bloc’s troubled members.
At 1:30pm this afternoon, the FTSE 100 was down 1.78 per cent at 5267 as global financial concerns continue.