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Stuart Hyde
Professor of Finance Manchester Business School, UK; member of the American Finance Association, European Finance Association, European Financial Management Association and Associate Editor for Research in International Business and Finance
With the help of an expert in Finance, Professor Stuart Hyde, Dukascopy is bringing you the insight of the UK's economic situation, the motives of the UK's Prime Minister's stepping away from the corrections to the EU Treaty, as well as the possible scenarios for development of the Euro area.
1) How would you assess the last EU Summit 8-9 December in Brussels and the decision of the UK Prime Minister David Cameron to reject the EU fiscal deal?
In most regards the last EU summit was too little too late. The structural problems within the Eurozone have been long standing and any belated attempts to strike some fiscal agreement is likely to be very complex and troublesome. It is highly unlikely that all member states or indeed all Eurozone states will agree on any treaty which binds them fiscally. Consequently the treaty will likely contain many opt-out clauses and that will not satisfy the markets either short-term or long-term. The decision of the UK Prime Minister to reject the fiscal deal was correct though the timing and the manner of the rejection is perhaps questionable. While it was certain that the UK would not sign up to any fiscal deal, the UK could have been more supportive to the discussions and attempting to ensure the current pressures in the Eurozone were reduced, leaving the negotiations on the protections for the UK finance industry to later in the cycle.
2) What is your opinion on the current economic situation of the UK and its further developments?
The current economic situation and outlook in the UK is weak. Indeed recent welcome news in terms of retail sales is only anticipated to be temporary, due to pre-Christmas discounting and is unlikely to continue into 2012. Against a backdrop of rising unemployment and lower growth, confidence is low even if inflation has peaked. There is little sign that business lending is growing and hence the economy will continue to stagnate at least until mid 2012. Attempts to address levels of investment through the National Loan Guarantee Scheme and spark growth may be in vain. It is unlikely that that the interest rate reduction is substantial enough to radically alter many investment decisions and hence lead to significant amount of new investment. Further any gains will pale into insignificance should the worst fears regarding the impact of the Eurozone crisis be realised.
3) What is your view on the future of the Eurozone and the solution to the debt crisis?
The future for the Eurozone is bleak. It appears that the EU summit has failed to deliver the necessary commitments required to satisfy the markets. There is increasing pressure on the Eurozone nations with most of the ratings agencies still undecided on whether to downgrade several Eurozone nations. It is difficult to see whether the recent negotiations and actions of the Eurozone are sufficient to ensure its survival. While the President of the ECB, Mario Draghi may outwardly suggest that the Euro will survive there are currently substantial doubts as to whether the crisis can be solved and a catastrophe be avoided. The ECB tender auction will be telling.
This will provide an opportunity for banks to borrow 3 year money at very low rates and injecting much needed funds and hopefully reducing pressure in the system and lowering yields. The real question is for how long will this reduce the pressure? The likelihood is that something far more substantial from the ECB will be required for confidence to return.