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Economic fundamentals mean potential for growth is key

As the stock markets have made clear, investors worry more about countries with low growth rather than those with high debts

Economic miracles are often credited to government policies and political leadership when a few crude fundamentals play a more decisive role.Proposals for a supranational authority governing the eurozone is a case in point. According to Germany’s Angela Merkel and France’s Nicolas Sarkozy, a tighter grip on the finances of Italy, Spain, Greece, Ireland and Portugal and a few cleverly constructed sovereign debt insurance schemes will do the trick.

Run by tough Brussels eurocrats, the plans will mend the finances of all concerned while reassuring voters in richer countries their wealth is safe. “A better future” awaits countries forced to accept more austerity.

Except, as the markets have made clear, fundamentals are working against this plan. Looking back on the last two weeks of turmoil it is clear investors fear putting their money into countries with low growth, not those with high debts.

Without growth, Italy and the others have no way of paying off their debts, or even the interest on their debts.

Under Brussels’s plan, privatisations, liberalised labour markets and huge welfare cuts will provide a platform for growth. The UK is a model.

Yet the UK’s only salvation has come through a lower exchange rate. Without a depressed currency – down by a quarter since the financial crisis hit – our goods, as with Italy’s and Spain’s, would be expensive. It is Italy’s and Spain’s battle with a high euro that has spurred economists to argue the eurozone cannot carry on in its current form.

Last year talk centred on Greece and other debt-ridden nations leaving the euro. But recently the debate in those countries is more focused on Germany quitting, maybe with the Netherlands, France and a few others to form their own currency, leaving the weaker ones with a devalued euro.

In an instant, they would be more competitive and have a chance of selling their wares on the world market, and so, in short, regain the ability to grow. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds