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Dukascopy is continuing to inspect the current European debt crisis, the recent adoption of the fiscal EU Treaty as well as UK's rejection of the Treaty. Today we bring you the insight on the matter from the expert in finance, Professor Malcolm Sawyer.
I think, first, in the way that UK's Prime Minister, David Cameron dealt with the EU Summit now nearly two weeks ago has to be understood against the background of utmost hostility to the European Union in the UK, particularly, the hostility to the European Union amongst his parliamentary supporters. That is going along with some ideas that the powers of the EU are interfering in the UK's economy in various ways and they need to reduce that sort of intervention. I believe that the way Cameron put it was to defend the interests of the city of London, but he was also in favour of limiting the impact of European rules on the UK. However, as it turned out, the UK is now isolated from most of the other members of the EU. The decisions which they are making may well be in their own interest, rather than taking into account the interests of the UK, so the UK may find itself in a weaker position than before, relative to the rest of the European Union.
I think that inflicting those severe budget deficits reductions requirements on the countries is going to be counter-productive and hardly achievable because the policy makers will have to impose austerity in their turn. The austerity measures will cut expenditure, but that in turn, will reduce income and taxation, and so attempts to decrease budget deficits in the present circumstances may not actually arrive as the reduction of the deficits. And particularly, if all countries together decide to reduce their public expenditure then income in each country will fall. It means what they buy from other countries will also drop.
Moreover, I regard as one of the biggest problems within the Euro zone that some economies are uncompetitive and run on large current account deficits. As far as I can see, there are no policies in place which could enable them to reduce their current account deficit without resorting to a deflation. Therefore, a country with a huge current account deficit, like Greece, either has to be able to continue borrowing from abroad in some way or it has to come up with a method of reducing its current account deficit itself. Greece cannot do so by devaluation because it is in the Euro area and so in a way it is left with a few options but to deflate, which is now inflicting considerable austerity on the Greek people.
From my point of view, there is a likelihood that over the next year the Euro will start to break-up and the countries will start to leave; it is going to be a major event and as a consequence of that there are likely to be significant defaults on debt and considerable effects upon the banking system.