2015 – And Europe’s Eurozone Woes Head The Agenda

What can we expect in 2015? A stronger dollar, as the US economy continues to expand – albeit on ever more borrowed money and an over-hyped stock market? Weaker sterling, perhaps, as the UK recovery remains patchy and our trade deficit keeps pulling down the pound?

How about a partial oil price recovery, as growth across energy-hungry emerging markets once again outstrips the West? Or maybe an interest rate cycle reversal – with America’s Federal Reserve raising borrowing costs at least once over the next 12 months, followed by the Bank of England?

All these outcomes are plausible in 2015 – with one proviso. If there’s a serious correction on global equity markets, growth will slump not only in the West, but across the emerging markets too. Our central banks would then keep interest rates down, with oil staying relatively cheap.

As 2014 ends, financial markets are fraught with systemic risk. There remains a fundamental disconnect between Western share prices pumped-up by printed money and a still unconvincing economic recovery. The recent rouble nose-dive, together with geopolitical dangers in the Middle East and Ukraine, point to further fragility.

Yes, the global economy could muddle through during 2015, relying on more quantitative easing courtesy of Japan and the Eurozone. We’d then see the continued rise of nominal GDP here in the UK, driving positive headlines but still stemming largely from rising public and private indebtedness and lacking self-sustaining momentum.

Such a scenario, the almost-but-not-quite-upswing, is probably the most likely, in fact, unless we endure a 2008-style “Minsky moment”. Were that to happen – courtesy of a significant sovereign bond default, a banking meltdown or some other “black swan” – then all mainstream economic forecasts would expire. I don’t think that’s the most likely scenario for 2015, but the chances are far from insignificant.

Rather than a string of bitty forecasts, I’m devoting the bulk of this year’s final column to Britain and our relationship with Europe – a subject I feel will dominate politics ahead of the May 2015 general election, the most unpredictable of modern times.

As the year turns, and campaigning hots up, the political narrative will clearly involve rhetorical jousting on deficit-reduction and immigration. As winter turns to spring, though, the question of the UK’s future in Europe, and in particular the mooted 2017 referendum on European Union membership, is likely to move centre stage.

One reason Europe will loom large in the UK’s political consciousness over the coming months is that the single currency crisis is flaring up again, five years after it began – and in the same place, namely Greece. Last Tuesday, the Greek parliament failed for the second time to elect a new president. That brings closer the possibility of snap election that could hand power to Syriza, a populist left-wing party determined to water-down the reform programme imposed by the EU and International Monetary Fund.

Two massive bail-outs in 2010 and 2012 kept Greece afloat, and within the eurozone, but sent the national debt soaring to 170pc of GDP, with international creditors imposing harsh “austerity” measures. While the German economy, like the UK, has ostensibly recovered from the late-2008 Lehman collapse, with real GDP now above pre-crisis levels, Greece remains over 25pc adrift – an downturn as long and deep as the 1930s Great Depression which so traumatised America.

Little wonder that Syriza, which vows to raise wages and pensions, is leading in opinion polls. Were it to gain power, its demands could be seen as so unreasonable by other eurozone members – not least paymaster-in-chief Germany – that a renewed Greek default, and single currency exit, returns as a real possibility.

Even if Syriza agrees to negotiate, other “peripheral” nations enduring IMF-EU austerity programmes will then demand similarly less onerous terms – which could send eurozone bond markets haywire. The Athens government has one last chance tomorrow (NOTE: MONDAY 29TH) to get its Presidential candidate approved by Parliament. Another failure, and public elections will be held in early January by default, which Syriza could very easily win.

Even if this Greek imbroglio is resolved, we’re set for a year of political turmoil in the eurozone, with more and more doubts being raised about the future of the single currency. Elections are due in Italy – the real GDP of which remains 10pc down on 2008, in part due to the nation being trapped in a high-currency straitjacket. The eurozone’s third-largest economy, Italy’s three main opposition parties are now all campaigning on a platform to leave the euro. Spain and Portugal will also hold elections in 2015 – and, again, anti-euro parties are set to make significant gains.

All this matters greatly to the UK. The eurozone is by far our biggest trading partner and there’s no way we can stage a full-throated economic recovery while the currency bloc is flirting with systemic collapse. A Greek exit could easily cause such an outcome, seeing as bond markets would then fear default-exit outcomes in other weak eurozone economies, leading to spiking borrowing costs across the region, so raising the prospect of a large eurozone economy such as Italy going belly-up. The fact that Marine Le Pen’s Front Nationale, which is also anti-euro, is now ahead of all other parties in some polls, could even bring France into the mix.

While this current Greek crisis has attracted relatively little international attention, a eurozone storm is brewing. The impact on British politics will be considerable. While there are many domestic reasons for the rise of Ukip, and euroscepticism in general across the UK – not least discontent over EU rules on loose border controls – the bandwagon only really got rolling after it was clear that the eurozone could one day collapse.

In the 2010 general election, Ukip won just 3.1pc of the vote. Current polls suggest they’ll take 12pc of votes cast in 2015, ahead of the Liberal Democrats. A major explanation behind this UKip surge has been the exposure of the euro’s structural weakness and incoherence – which has severely discredited the entire European project, making it far more acceptable for mainstream voters seriously to countenance leaving the EU.

I’m a “negotiate then decide” man. I’ll vote to stay in the EU in any upcoming referendum, but only if we negotiate genuine change in an organization that has become grotesquely and dangerously over-mighty. Firstly, the commitment to “ever closer union” must be scrapped – the EU needs a traumatic “Clause Four moment”. There also clearly needs to be tougher control of national borders within the EU.

The single market – the most beneficial aspect of EU membership – must be deepened, with Brussels promoting free trade in goods, not people. While I’d accept some EU-wide votes on certain issues related to the single market, crime prevention and even the environment, such votes can happen in national parliaments then be collated – doing away with the ridiculous expense of the European Parliament and MEPs that nobody has heard of, elected via anonymous party lists.

I want “fortress Europe” dismantled, with Brussels encouraging more EU trade with the rest of the world, not least the emerging markets. If the euro is to continue, a clear and orderly exit mechanism must also be established, if we are to avoid regular systemic instability.

As the 2015 general election approaches, turmoil in the single currency zone could well fuel rising UK euroscepticism. Labour and the Liberal Democrats would then be forced to offer a referendum, with the Tories’ existing pledge becoming firmer still. All that will hopefully spark a genuine debate on Britain’s EU membership. It’s about time too.

http://www.telegraph.co.uk/finance/comment/11314563/2015-and-Europes-euro-woes-head-the-agenda.html

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