Testing the Euro as a reserve currency…

After such a faltering decade of mixed growth, and different prospects for the members, the Euro is having it first true test as a reserve currency.

After a recent vote the German parliament has passed (by 523 to 85) a vote to bolster the € 440bn eurozone rescue fund, the European financial stability facility (EFSF). As the FT says, the vote

“would strengthen the hand of the government, and revive confidence in Angela Merkel’s ruling centre-right coalition. They said it should alsosend a strong signal to eurozone partners that Germany was “ready to resume its responsibility” in the eurozone crisis….“Within the coalition, it is a very strong and comforting signal,” said a senior adviser. “But we are under no illusions that the next steps are just ahead, and they are going to be every bit as difficult.” “

The EFSF could easily become the most powerful tool available to the EU. It needs ratifying, and all decisions require unanimity. This is both a strength and a weakness: the market needs assurance that any action will be sufficient and responsive. Weeks of political negotiations will not be acceptable, the market will make its own decision.

Greece has to decide if, in addition to it’s fiscal retrenchment, that it wants private creditors to increase the haircut they have presently accepted, by taking a bigger writedown on the value of their bonds.

It is certain that even at € 440bn, the EFSF is not large enough to deal with a new bout of market speculation. By investing the facility with institutional powers, and giving it the power of leverage, this problem could be solved. Even with a small leverage ratio, the EFSF would remain a desirable investment. With the US recently losing it’s triple A status (and the world not ending), even if EFSF didn’t attract a triple A, it would still be cheap at the price to stop a run on Spanish or Italian debt.

Alistair Darling’s first Budget…

Today, the Chancellor Alistair Darling delivered his first budget, prompting what can only be described as a lacklustre response. Financially cautious with limited social engineering intentions, it aimed to be a budget that halfway nodded towards the preoccupations of the moment.

These include green levies, such as the “aim” to levy a charge on plastic bags. Fuel tax manipulation has been put on hold, with an acknowledgement of $110 oil having pushed petrol prices to an already recent high. On Growth, the forecast for this year has been lowered to between 1.75 and 2.25 per cent. On Inflation, recent fuel and energy prices will stoke inflation during 2008, though he predicts a return to target (Target – 2%), by 2009.

On Public Spending:  to grow by 2.2 per cent in the next three years. On business, an interesting aim: target for small and medium-sized businesses to win 30 per cent of public sector contracts in the next five years. On Tax – new charge (anticipated at £30,000) on non-domiciled residents to be introduced from April and to remain in place for present and the next parliament. Beer duty to increase by 4p per pint, wine up 14p a bottle, cider up 3p a bottle and spirits up 55p a bottle. This could put the price of a pint in a typical pub, up by 12-15p, once VAT and margins accounted for – and the price of a bottle of spirits by 80p in a supermarket. These are significant increases and reflect growing Parliamentary acknowledgment of the need to “do something” to halt the permissive and pervasive attitude to drink in this country. Campaigners are not convinced that the tax system is the mechanism for achieving this change.

Tobacco duty to rise tonight by 11p per packet of 20 cigarettes and 4p for five cigars.

Supporting Budget 2008 documentation can be obtained  from the  UK Treasury’s own site at http://www.hm-treasury.gov.uk/budget/budget_08/documents/bud_bud08_docsindex.cfm

We would argue that this is a profoundly flat budget, short on ideas, limited in scope and desperate for inspiration. Financially it states that extra revenue gleaned through additions to Duty will be re-directed to pulling more poor children out of the definition of poverty. Raising Child Benefit to £20 for the first child being the chief means of achieving this end, coupled with micro measures such as adjusting Child Tax Credits. These, however, are small beer and seem if anything, to be the tired and heavy breathing of a Government in much need of the recuperation of Opposition.