One of the most worrying aspects of the inability until yesterday of the Eurozone countries to reach agreement on what to do with Greece is that it calls into question their ability to deal with the much bigger problem of Italy. The Italians have passed various structural measures through their Parliament, but there remains a level of doubt in world financial markets. The seriousness with which the world views these changes and the ability of prime minister Berlusconi to carry them through remains questionable.
Why does this affect us?
Leaving aside the failure of Greece, a wobbly Italy would seriously weaken the value of the Euro. The Euro weakening against Sterling suddenly makes our goods and services more expensive to our European neighbours, who are by far our largest trading partners (bear in mind that this also includes Ireland). The UK, like all countries, is reaching for growth in order to address the budget deficits. Our growth will come selling goods overseas – exports – but if we are ever more expensive due to exchange rate pressure, how does this help?
Fortunately the Far East countries have an interest in maintaining the Euro’s value, so that may at least stop it devaluing. Sterling at this point will not strengthen until some confidence starts to appear in the economy – which is certainly not immediate. So the equivalence in value – the “pairing” – of Sterling and the Euro may not change in the near future.
It will be interesting to see what steps the Bank of England might take in order to remain competitive if it does.