Stocks just about managed to snap a three-week losing streak on Friday but the FTSE is still down nearly 7 percent for this month; selling at the beginning of May would have been a very smart move. For now it's hard to see how asset markets won't continue to be held hostage by uncertainty surrounding a possible Greek exit. And that uncertainty is continuing to feed into poorer economic numbers as witnessed by the Eurozone PMI's and German IFO numbers.
In fact, whether we get any kind of euro breakup or not, the damage from the idea that it might happen continues to grow. Reports have highlighted how banks are now beginning to match lenders and borrowers within national borders, wiping out any benefits from a previous single zone and until we know how the zone survives and in what shape I can't see why any overseas investor would take the risk of putting money to work in any of the peripheral countries , further compounding the negative growth spiral.
There's a sense that the Greek electionson June 17th may prove to be a cathartic moment; my fear is that it will be anything but. On the one hand is a series of events where we find neither the Germans nor the Greeks are bluffing, the money runs out and that forces a Greek exitwhich tears up the irrevocability of the single currency. Once that happens the chain of events is very hard to predict, but speculation on which country would follow next would be rampant.
On the other hand we get a result that sees Greece renegotiating parts of its bailout and attempting to stay in the euro zone. In this scenario, many will believe we have just delayed the inevitable and continue to act accordingly.
In such a climate all the fresh talk of a growth compact becomes fairly pointless. Project bonds and infrastructure spending are tinkering at the edges and supply-side reforms need the private sector to feel confident to invest. But confidence for large-scale investment will never materialize until investors know with some certainty what the future in Europe holds.
Right now there is not a single person who knows what will happen in two weeks, two months or two years. Europe needs to decide what the future looks like and then its leaders need to clearly explain the costs and sacrifices needed to attain that future and start making it happen. I may be wrong but I'm not sure we should be optimistic for an early resolution. When it comes to European politics fudge has always been the horse to back.
And Fudge allied with fear is why yields on UK government bonds—also known as gilts—and on German bonds—known as Bunds -have hit fresh record lows. Over the last 12 months 10-year gilt prices have risen by 15 percent. On any normal metric there is clearly no value, yet plenty of forecasters predict yields will keep going lower. Bearing in mind the current poisonous mix of euro zone politics and economics, I dare not suggest they're wrong.