The excitement continues in the Eurozone and it seems that Europe has stalled until the issues are fixed or until they destroy the euro.
But what exactly are the issues?
Many economists say it is a result of the fixed exchange rates inherent in a monetary union, that does not also have a fiscal union i.e. a central tax and spend authority. These same economists express relief that the UK is outside the euro and hence can devalue its currency to “help” fix the economic problems faced by the UK.
There is however a different explanation to the underlying problems in the Eurozone. Governments are simply spending too much on: public sector wage costs; regulation and on providing a safety net (unemployment benefits; health benefits etc.). To keep this apolitical, by too much I mean more than their taxpayers are prepared to pay in tax.
The problem is exacerbated as economic power shifts to “low cost” countries with virtually no safely net and little regulation. Europe becomes more uncompetitive and loses more jobs.
What we have seen in Ireland and will start to see in Greece and Italy is a reduction in government spending, some increases in taxation and probably an increase in the work ethic as pressure to respond to the low cost economies grows. Change is being forced on these countries only because Germany refuses to cover their debts.
I think the jury is still out on the UK’s "advantage": devaluation.
Devaluation may help exports in the very short term however it is usually followed by inflation, as the UK has seen over the last 50 years, but, without addressing the underlying problems.
UK productivity is poor by international standards and the UK education system has fallen steadily in international rankings over the last few decades. We all need to work more effectively for fewer rewards and at increased risk to get ourselves out of this mess.
As I have said before the private sector is well into this change process let us hope that the public sector can respond too.
Lest anybody doubt the problem: in 2010 the UK had a similar budget deficit to Greece and one that was twice as big as Italy. Yet incredibly our government long term borrowing is about the lowest it has ever been. If we falter ..........
A review of previous debt crises by McKinsey suggests that recovery will take 6 years at least and that the economy will fail to grow much in the next few years.
Economic problems cause pressure which increases the rate of change and hence Entrepreneurs and business angels can look forward, I am sure, to a period where there are some real opportunities for new businesses to be created and grown.
Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.
Best Wishes
Neil Mackay
Managing Director