The latest news is it’s considerably cheaper to extend the shelf-life of a cauliflower than that of a Spanish bank. While the latest led fridges encourage your groceries to carry on photosynthesising and won’t cost more than €900, eurozone finance ministers have agreed to release the first €30bn instalment of the €100bn promised two weeks earlier by EU leaders to recapitalise Spain’s ailing financial institutions. It was not an easy decision to make, especially for Germany’s chancellor Merkel, but it was hailed as a breakthrough at the time by EC president Herman Van Rompuy.
Investors are sceptical. Most of the recent EU crisis summit meetings have delivered euro-preserving breakthroughs, even if that is not precisely how they were billed at the time. Yet still the single currency stumbles from one fudge to the next. It must be observed, in fairness, that Merkel’s endorsement of the use of bailout money to help banks directly opens the door more widely to a wholesale resolution of the sovereign debt crisis. Even so, there is still a long road ahead and the tolls could be expensive.
Throwing money at a problem is not necessarily the only way of solving it. Those lacking the cash for a photosynthetic refrigerator could instead draw on hot water from the tap. Modernist gourmet Nathan Myhrvold advocates covering strawberries with water at 60ºC for a few seconds before drying them and putting them in the fridge. Thus will they last several days longer than untreated fruit.
By the same token, the €500bn in the European Stability Mechanism’s kitty might not need to be spent if investors warm to the euro. If EU leaders can persuade the world that they are serious about preserving their currency, and that they will not allow sovereign member states to go unfunded, then investors might well look at the 7 per cent returns currently available and decide to buy.
For the moment, however, they prefer the safety of German, Japanese, American and, yes, British government bonds. This is why the euro is close to its lowest level against the yen in 12 years and sterling/euro is at its highest point since 2008.
The euro looks less bad against the US dollar. Although it is towards the bottom of its five-year range, and within half a dozen cents of its early 2006 low, the euro shows no sign of returning to the very low levels it experienced in its early days. One factor in that resilience is the concern among investors that the US might also be heading for a showdown.
If November’s election perpetuates the split between Congress and the White House, such that it remains impossible to agree a proper budget, automatic spending cuts and tax rises will come into effect. The idea of this automated process was to scare the Democrats and the Republicans into a compromise with one another. That still hasn’t happened and, if there is no compromise by the end of the year, some analysts predict the US economy will ‘fall off a fiscal cliff’.
For now it is still the euro that commands investors’ attention. They don’t like it much, but they are waiting to see if anything serious comes of the Brussels Breakthrough. The impasse could go on for months.
