Despite another bad day for news in the eurozone, investors have remained relatively calm in the UK today, with the FTSE 100 index of leading company shares closing only slightly down.
Greece is scheduled to have another set of elections next month, Spain has seen its bond yields surge higher and the Bank of England has warned that the eurozone is “tearing itself apart”.
Taking stock of the situation, Andrew Wells, Fidelity’s Global Chief Investment Officer for Fixed Income, has provided a briefing note for advisers and investors.
Wells believes the real work in Europe begins now, as recent elections have concluded. He sees France as having the choice between being part of the “problem children” (including Italy, Spain and Greece) or being at the heart of Europe along with Germany.
Despite his socialist principles and election promises, will President Hollande really risk being sidelined in Europe and lumped in with the likes of Greece? Wells thinks Hollande will remain pro-growth but do so responsibly.
Wells believes that the situation in Greece is more dangerous.
The two main political parties in Greece have lost all support. It does not appear that Greece will receive the next tranche of funding from Europe as the $3bn of spending cuts they must make in the coming weeks simply will not happen.
The risk of a disorderly exit from the eurozone by Greece has dramatically increased. The markets no longer believe that Greek bonds will be repaid in full.
Wells says there is a 50:50 chance that Greece will exit the eurozone.
The political situation in Greece could develop very quickly, with public opinion driving the political agenda.
One possible outcome for Europe described by Wells is fiscal integration, with the harmonisation of taxation, fiscal policy and budgetary responsibility. That is not a quick fix and would also require public support, something that appears sorely lacking in some countries.
Overall, the risk of the whole eurozone collapsing is small because the consequences for the global economy would be so dire.
Photo credit: Flickr/Estonian Foreign Ministry
