The Short View

February 4, 2013 7:19 pm

Now is the winter of EUR discontent

As bones from a British car park were confirmed as those of Richard III, the last king of England to die in battle, skeletons in Spain are being looked for in the usual place: political closets.

Markets woke up to the slush fund scandal engulfing Spain’s ruling Popular party on Monday, and remembered the biggest risk in Europe is the toxic mixture of banking and politics.

Investor confidence was not helped by the progress being made by Silvio Berlusconi in Italy. The former premier, whose ghost haunts the euro crisis, is gaining in opinion polls after promising tax cuts.

Spanish bonds were once again at the heart of the euro’s problems. Bond prices had their 14th worst day since 1990 and fell the most since last August’s initially disappointing European Central Bank meeting.

Their fall was mirrored in the euro’s worst day this year and in plunging bank shares. Italian bonds suffered less but investors suddenly noticed that the third rescue of Monte dei Paschi di Siena – the bank founded the year Richard III was married – combined with political uncertainty was perhaps not the best support for Italy’s financial sector. Italy’s FTSE MIB index lost 4.5 per cent.

The question investors must answer is whether the euro crisis is kicking off again, or if this is just a correction.

On the bearish side, Europe’s politicians have failed to take advantage of the ECB-induced calm since last summer to push through eurozone-wide reforms. Further progress will be difficult with Italy and Germany in election mode and Spain’s Popular party as unpopular as it has ever been.

On the other hand, a correction was overdue. Markets rose too far, too fast. Things look better in the eurozone than before the ECB stepped in, but obvious problems – from banks to the economy – were ignored.

Monday’s drop is healthy. Sadly, it will take bigger falls to give politicians a sense of urgency about eurozone reform.

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