The local newspaper headline ‘Brighton vegetable squatters removed’ promised more than it delivered. The squatters turned out not to be vegetables, but ordinary people selling fruit and veg from a shop they had taken over. Nevertheless, the story provoked a spirited debate between readers who supported the squatters’ freewheeling enterprise and those who argued they should pay their taxes like everyone else.
A similar debate rages in Greece. The establishment insists the country must follow the rules and balance the books, even if it means economic pain in the short term, while the anti-austerity faction says enough is enough – we’d be better off going bust. Following the chaotic general election in early May investors fear the anti-austerity movement may win the day. If they do, many believe Greece’s days in the single currency will be numbered.
Adding to the worries, one of Spain’s biggest banks has undergone a partial nationalisation. Bankia needed an injection of around €10bn – twice its market value – to avoid defaulting. Bankia is not the only Spanish financial institution to be overloaded with non-performing loans to property firms. The question is whether Spain can avoid the widespread banking problems that brought Ireland to its knees. Investors have yet to be convinced it can.
Against that background it is not hard to see why the euro has been having a difficult time. Although EU leaders have a track record of pulling things out of the fire at the last minute, with democracy running riot in Athens and Spain’s financial system weighed down with bad debt, now is not the time for unrestrained optimism.
Investors are sweeter on the British pound. So fond have they become of it that they have pushed the Bank of England’s trade-weighted sterling index to its highest level since August 2009 and sterling/euro to a three-and-a-half-year high. The pound is 14 per cent up from its late-2008 low. Having put three years of effort into keeping the currency competitive, the Bank of England governor will be less than overjoyed at this development but, so far at least, he has done nothing to reverse it.
At its May meeting, the Bank’s Monetary Policy Committee decided, as expected, to leave its stock of asset purchases steady at £325bn (€404bn). As well as being supportive of the pound in its own right, the decision also fed the market’s suspicion that the preliminary first-quarter output figures might be underplaying the real situation. In particular, the Q1 GDP data included a 3 per cent decline in construction output. In contrast, the UK construction sector purchasing managers’ index has been indicating growth for the last two years. The most recent reading was a comfortably positive 55.8 on a scale of 0-100.
The antipodean dollars both scored record highs in February, since when they have been on the retreat. If they were to fall further, there would be every encouragement from the authorities. The Australian prime minister has been keen to draw attention to falling interest rates. The Reserve Bank of New Zealand governor says he would take positive action to depreciate the New Zealand dollar if he had access to the appropriate tools. Intervention is not an option though. The prime minister of New Zealand, John Key, described it as the stuff of ‘la la land’. 'I don’t believe in intervention – never have and frankly never will. I spent my professional life looking at it and it fails.'
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