PM Cameron has indeed expressed his view that Brits should have a referendum about their membership in the EU. The vote, suggested by Cameron to be in 2017, and assuming his reelection in 2015, is certainly not imminent. There are advantages to the suggested deferred vote. Perhaps the looming EU referendum may curtail the regulatory overreach of the Brussels bureaucrats, often viewed as rules from above without representation. Another consideration for the deferred vote is it buys time to see how the single currency fares over the next five years.
For taking this conservative approach, Cameron was blasted by Chirstoph Scheuremann in Der Spiegel who wrote:
"Europe's Scaredy-Cat... Fear drove David Cameron to promise Britain a referendum on EU membership. Fear of his party, fear of voters, and fear of the EU itself, which he neither fully understands nor has ever really been interested in. He wants Europe to be a free trade zone with beach access. He missed an opportunity on Wednesday to haul Britain back to the center of Europe."
"Eurozone crisis: It ain't over yet... All G7 economies are struggling in the post-crisis climate, but U.S. GDP has recovered to pre-crisis levels, while the eurozone simply hasn't. This column portrays the global crisis as a transitory shock for the U.S., but as a quasi-permanent shock for Europe. The policies that are needed get the eurozone back on track do not seem to be politically feasible. As tension rises with every quarter of stagnation, prospects for the survival of the euro are not only not improving, they are actually getting worse.
Despite apparent calm on the financial markets, no illusions that the storm is ending soon should be entertained. Indeed, we may well be in the eye of the hurricane."
This paper was originally delivered to a joint meeting of Johns Hopkins University and Bologna University. Some of the reasons cited to justify his view that the euro crises is not over are:
Using 1906 as a base year, the U.S. GDP is now up by 7%, while the eurozone GDP is up by a mere 2%.
There has been some recovery in the U.S. labor market, but the EU unemployment is at its highest level. (Today, Spanish Unemployment, reported quarterly, came in at a new high of 26.02%. In the U.S., the number of first-time unemployment claims was down to 330K, a new low, although the number may be suspect, since there were estimates for three states, including California, because they did not complete their reports.)
Since 2006, the German GDP is up 8%, but during the same period, the Italian GDP is down 6%. (With a strong euro, how does Italy recover export markets?)
The Central Bank purchases of securities as a percentage of the GDP has been only 3% for the ECB, compared to about 17% in the U.S., and 21% in the UK.
These are a few good reasons David Cameron is best not hauling Britain back in the center of Europe. The European economy is foundering, with little hope of turning around.
Other evidence of the weak European recovery can be found in the Eurostat report, released yesterday. This report shows that ratio of government debt to the GDP ratio increased in the last year for 22 member states. The largest increases were recorded in Cyprus, 17.5%; Ireland, 13.4%; Spain, 10.7%; Portugal, 9.9% and Italy, 7.4%. The biggest decrease was in Greece, 11.1%, where the debt was written off.
This is simply more evidence that the Teutonic-inspired austerity plan stifles growth, and causes debt and unemployment to increase. With time, leaders, perhaps including Merkel, will be replaced, and there will be new policies. Buying time seems to be the best policy for PM Cameron.
So is the euro currently trading in the eye of a hurricane? I have a vivid recollection of being directly under the eye of a category 3 hurricane while living in Florida in 2006. It was awesome. The rain and the wind stopped, and you could see the blue sky. Then the wind resumed, stronger than before, from the other direction.
Looking at the EURUSD (FXE) hourly chart, we see brief periods of frantic activity going both ways, but remaining range bound. The daily trade has been in a congested zone for over two weeks. Could it be that funds are being repatriated to the eurozone now that the perception is that the debt crisis has been resolved? And if this is the case, where does it end?
There may be a trade here, but I do not know what it is.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.