Posted by: Pete | September 23, 2011

When the going gets tough ……!

The bizarre thing is that companies aren’t the problem. They have performed well recently but they are being punished because analysts wrongly perceive the impact their access to bank funding will have on performance and are over cautious that growth in earnings will be stunted.

Companies have done well since the 2008 crash and many have healthy balance sheets. They have learned to survive through difficult times and where access to borrowing has been required, it’s been at a very low cost. As ever, institutional investors follow like lemmings and fail to attack the root causes of their insecurity.

The real problems are; Governments spending on the wrong things, and the political drama which has led to the Euro crisis. Without fiscal unity, which very few nationals want, the Euro project is bound to fail. Against this backdrop, even the mighty US economy is powerless.

We live in an interdependent world, the US and China need healthy European economies to foster demand for their exports. Little wonder Obama has lost his patience with Europe’s’ inability to act decisively.

Europe is infamous for failing to take difficult decisions but unless they are taken, a meltdown is inevitable. There is an old saying. “you can’t kid a kidder”, do the European ministers really think they can kid investors? It’s about time they all got real and faced up to what has to be done.

Three tough actions are needed.

1) The European Central Bank needs to ring fence a crisis fund to provide short term support for the weaker member currencies. Germany and French taxpayers – who voted for the Euro, must meet this cost, supported heavily by China in return for long term market concessions.

2) An orderly exit of weaker members i.e. Greece, Portugal & Spain needs to be planned immediately – rather than allowing it to happen by default. Italy should also be considered for possible future support and managed exit. It may be that a new,  lower value European currency needs to be introduced to provide a half way house for countries on the way in, or out of the zone.

3) The UK needs to stop wasting money on half baked schemes and focus on stimulating growth in it’s own economy. A 6 months reduction in VAT to 10% would help as a starting point.

If the pound becomes a ‘safe haven’ our exports will become expensive at a time when demand in world markets is in decline.

When the going gets tough, the tough get going!

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