Currency Watch: Markets in flux

The shifting sands of the Greek political landscape seem to slipping back towards the less extreme parties if the most recent opinion polling data is to be trusted.

The Syriza party, who are in favour of renegotiating the most recent bailout plan with the EU/ECB/IMF troika now sit in 2nd place behind the New Democracy party having been in the lead since the elections earlier this month. I was however reminded this morning that there are hundreds of opinion polls to come and most of them were wrong last time as well.

Brussels released its economic report cards at midday and to put it bluntly most member states would be re-sitting exams. The Commission released a whopper 100,500 page report on the economic health (or ill-health) of the 27 member states. The main structural highlights for the UK included high private debt levels, a low-skilled labour force, a shortage of affordable housing and a widening trade balance, as high GBPEUR continues to weaken UK exports.

The bulk of the report was hard number crunching on country specific targets, revisions and progress to date. We can expect contraction in 2012 for Italy and Spain, modest growth for the UK and France with stalling growth for the Germans. The report, a far cry from the latest John Grisham page-turner, did offer some interesting sub-plots and a few punchy proposals.

Ollie Rehn, the EU monetary affairs chief, suggested granting Spain a 1 year extension on its debt reduction pact. Germany should raise wages to lift competitiveness across Europe and France needs to try harder and do more to meet its 3% deficit target. It made proposals for the formation of a Banking Union. This would allow European banks to share the burden of failing banks. This proposed banking union shares a striking resemblance to its associate, Eurobonds, albeit wearing a different frock and bonnet. The underlying principals are the same, this union will alleviate pressure on the troubled sovereigns at the expense of the Germans, who will of course be absorbing the brunt of the risk. We have seen it all proposed and dismissed before.

The EU said it was able to envisage the bailout fund directly recapitalising the struggling banks, as proposed earlier in the week by Spain. This will relax the burden on national government finances by adopting a more direct approach. If this plan was to ever gain any legs, EU legislation would have to be changed. No sooner had Mr Rehn sat down following his speech had Germany, Austria and Finland already denounced the plans. More long term solutions to short term problems… brilliant.

The ECB meet next week and markets will be hoping they do something to ease their nerves. Until then we are in for further losses.