Watching events develop in Greece brings to mind the comment made by Professor Sir Ernst Gombrich (1909 – 2011) in his seminal book, A little history of the world, that “the Greeks could do everything but live in peace with one another”.
The famous art historian was actually looking back to the wars between the ancient city states of Sparta and Athens in about 430 BC. He could, however, just as easily have been describing the tension between a government that knows it has to find some way of reducing its borrowings at a time when there is insufficient economic growth to generate increased revenues and a population that appears unprepared to accept any further austerity measures.
What are the options?
Arguably, had Greece not fought its way into the Eurozone (some say by being economical with the facts about its true financial status) it would not currently be in such a mess. If it still had the Drachma, it could allow the valuing of its currency to fluctuate in order to make its overseas repayments cheaper, in domestic terms; as the UK has done in the past. With the Euro firmly in place, this is not an option – without withdrawal from the ‘club’. Unfortunately, it has been estimated that leaving the Euro could cost every Greek person the equivalent of €9,500 to €11,500 in the first year alone.
The Greek people appear to view demands for reduced social spending as unwarranted foreign interference while the Germans, effectively the Eurozone’s paymasters, are unwilling to suffer financial hardship in order to help a country that they see as indolent and unwilling to accept any financial pain as a consequence of their previous profligacy.
Does the Euro have a future?
While we may be tempted to stand back and congratulate ourselves for refusing to join the Euro – which could turn out to be Gordon Brown’s sole positive legacy – the fact remains that it is in our interests to have a strong Eurozone. A significant proportion of our trade is with them and our banks have lent to them considerable sums (along with Italy, which has just had its sovereign debt credit rating cut by Standard and Poor’s from A+ to A).
This close relationship makes us vulnerable to any economic decline there – especially as our other leading trading partner, the US, is not doing very well either – one reason why we have not objected to putting money into the rescue plans though our shareholding in the IMF.
What does this foretell UK investors?
There are three key issues for the UK. First, we cannot afford to allow the government to take its eye off the ball of cutting our deficit. However much public sector unions may decide that their members are disadvantaged by the debt reduction measures being taken, the fact is that their salaries – and pensions – are paid for by the rest of us. In any event, the pension changes proposed are most unlikely to disadvantage most lower-paid workers and could actually benefit them, because of the way career average pensions work.
Secondly, while there may be no “Plan B”, it seems essential that the government should take steps to boost the economy by bringing forward some of the capital spending planned for later years, in order to help increase GDP. The private sector has a far larger role to play, however, and it is more important that the government creates an environment of positive support for wealth creation as a matter of urgency.
Does this mean cutting the 50p tax rate? Probably not, for political reasons; however, other tax incentives to entrepreneurs and foreign investors could help.
Thirdly, at an individual level, whilst adopting a ‘defensive’ investment strategy could be seen as something of an overreaction, looking carefully at how your investments are allocated could be a very good idea, in view of the likelihood of further turbulence ahead.
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.