Sharrow Marrow, a greengrocer in the northern UK town of Sheffield, has published its annual calendar, featuring seasonal fruit and veg. According to the Sheffield Telegraph, January’s highlights are 'blood oranges, forced Yorkshire rhubarb and Channel Island daffodils'.
If the EU produced such a publication, its January page might feature blood on the streets of Athens, forced Italian austerity and the narrowed irises of investors around the world. Two years after Greece revealed the scale of its hidden debt, its domestic crisis has blossomed into a sovereign debt crisis enveloping Italy and Spain, threatening the future of the single European currency project. From being nervous about lending to Italy, investors have become nervous about lending to any bank who might have lent to Italy. It now falls to the European Central Bank (ECB) to provide the liquidity they need because the normal channels have ceased to function.
The effect of the unfolding crisis has been slow to come about. During the first half of 2011 the euro was even on the advance. Investors could not comprehend a situation in which EU leaders would not take the steps necessary to stop the rot. They can now though. The grand idea of Germany’s chancellor and France’s president is that countries must pledge to observe a ‘fiscal compact’ that will oblige them to balance their budgets and so prevent a re-run of this crisis. Investors’ reaction to the proposal is along the lines of, ‘Fine, but what are you going to do about the current problems?’
Only the ECB seems to be actively involved in addressing the ‘now’. Before Christmas it lent €500bn to 500 banks for three years at 1 per cent interest in the hope that a chunk of that money would be invested in Italian bonds yielding 5 per cent. Instead, it looks as though most of the banks are sitting on the cash, even depositing it right back with the ECB at near-zero interest rates, because they want a cash cushion in case things get really bad. This has not been good for confidence in the euro, which has hit 15-month lows against the US dollar and the pound.
Strangely, public-sector spending cuts and wall-to-wall austerity have failed to make us more economical when it comes to selecting fresh produce. Some blame the system by which EU and DEFRA gradings relate not to taste or nutritional value but to the appearance of produce. It is as if they were to award the Man Booker Prize according to the quality of a book’s jacket.
It is not entirely different from the way investors view the US dollar. Dollars all look the same, they are easy to buy and sell, and nobody has ever had to return them to the shop. But don’t look under the skin. The US has a national debt roughly equal to 100 per cent of GDP. Although that is lower than Greece (120 per cent) and Italy (120 per cent) it is too high and US government borrowing is still growing more quickly than the economy.
Investors would not usually be so keen to lend to such an insatiable borrower, but they don’t have a choice. While they are nervous about Europe, there are few other places to stash their cash.
The easiest option is to invest in US Treasury bonds. They can be sure of repayment because the Treasury can print as much money as it wants – unlike Italy, say, or France. The situation is less than ideal but the US dollar ticks more boxes than any other currency right now. For that reason it is likely to strengthen further in coming months.
