Why Greece Needs to Leave the Euro

The problems with the Eurozone are beginning to unravel and it is becoming clear that for the Southern economies, joining the Euro was a mistake. We believe that Greece leaving the Euro is inevitable. The only question is why has it taken so long? Greece leaving the Euro will have significant ramifications for several of the major European banks which makes it complex to negotiate an orderly exit for Greece. 

The problems with the EU stem from the fact that the weaker economies in Sothern Europe joined the Euro at too high a rate. This enabled countries such as Greece, Cyprus and Portugal to increase their spending power and enabled it’s citizens to buy expensive goods such as BMW’s and Mercs which they previously could not afford. Similarly, goods produced in the Southern economies such as wine and olives suddenly became expensive to produce and were no longer competitively priced. The impact of the above means that the richer Northern European countries have effectively subsidised their goods and sold them to the weaker economies in exchange for debt. It has now become apparent that the weaker EU members are not able to repay their debts and banks such as the Bundesbank are saddled with significant loans to other European central banks. 

The current situation has become unsustainable and there is significant risk that some of the major banks will either collapse or face nationalisation. In our view a break up of the Euro is also likely. A separate currency may well be required for the weaker EU members in Southern Europe. We do not believe it is possible for the Greek economy to recover without some form of currency devaluation. For contractors and small businesses with EU deposits, we recommend that you move your funds to Banks within Northern Europe.

Cyprus Faces Tough Austerity Measures Following Euro Bailout

Cyprus is the fifth Eurozone member to receive emergency funding following the need to recapitalise its major banks who sustained big losses caused by Greece’s debt restructuring in March.  Cyprus is chasing a second loan from the Russian government to add to the €2.5 billion it received last year and is also looking to china for aid. 

The plight of Cyprus highlights the shortcomings of the EU fiscal and monetary policy. Prior to joining the EU in 2008, Cyprus had impeccable credentials and was operating a budget surplus of 3.5% with government debt amounting to 59% of GDP.  Last year, Cyprus fell foul of EU rules after reporting a budget deficit of 6.3% and public debt of 72%. The country will now face tough austerity measures in order to meet it’s EU targets. 

Households and businesses in Cyprus have very high levels of private indebtedness meaning that the country is vulnerable to the slowdown in the economy and rising levels of unemployment. Unemployment was less than 4% when Cyprus joined the Euro, now it has risen to 10%. Such increases mean that households and businesses will struggle to meet their debts. The danger is that austerity measures could prove too strong for an economy struggling to bring down its private debts.

Further Scrutiny for Public Sector Contractors

Government ministers are being urged to probe into government contractors who may be avoiding tax. This follows on from government attempts to clamp down on tax evasion following negative press over Jimmy Carr’s offshore tax avoidance scheme and the scandal over public sector workers being paid through personal service companies earlier in the year.  

The government is being urged to undertake an urgent review of the tax affairs of its major contractors and suppliers to ensure they are paying their fair share of taxes. The UK deficit rose in July and the government is facing a crisis by not having enough tax revenue to fund its expenditure. Clamp downs on tax evasion are now high on the agenda and companies would be advised to make sure they file their returns on time to reduce the likelihood of being placed under scrutiny. 

Government contractors will be affected as the UK government is likely to review its procurement procedures and consider whether its suppliers are paying their taxes.