It will be Britain’s Olympic year, but eyes will remain firmly focused on the continent.
A new set of acronyms for the new Europe will spring up, as the FANGs [France, Austria, Netherlands and Germany] come out to replace the PIIGS [Portugal, Ireland, Italy, Greece and Spain], who almost certainly might fly. There is the high cost of leaving the euro to consider. Member states would immediately have to impose capital controls by closing the borders to prevent the inevitable flight of cash stockpiles. Along with capital controls, there will be trade controls to prevent companies simply trying to get as much cash out as possible.
There are so many open questions. One wonders what Merkel’s miracles can achieve: What is the new exchange rate? Would the new currency still be called the euro and marked until the printing press spits out the new designs? How would the debt be handled? What is the cost of re-capitalisation of the banks? Who runs the new stock market and, again, what is the currency?
The list is extensive and makes for sober thinking, which Europe’s politicians are so desperate to avoid. The European Central Bank’s printing machines are warming up and austerity is peeking through the window. At a minimum, there is a deep recession and for many countries a long depression. Could they default on this debt? They could, but this just pushes it onto the banks and bond holders, which would simply create another form of recession and depression.
It is difficult now to imagine what will result from exiting. There may be a nostalgia element in bringing back the Drachma or the Escudo, et al, but it will not be easy and the savings of a generation will be almost wiped out.
PIIGS might fly and land on the shores of the US, just in time for the presidential elections.
Jon Wingent is investment client director at Close Brothers Asset Management.