Euro Pressured by German Impasse

Euro suffering as Germany faces “End of an Era”

The inability of German Chancellor Angela Merkel to form a coalition Government with the Green Party and the “pro-business” Free Democrats could spell the end of her twelve-year reign as the undisputed leader of Germany and de-facto leader of the EU. In a meeting yesterday with the German President, Mrs Merkel said she preferred to hold fresh elections rather than try to lead a minority Government but was told that she owed it to the German people to try to form a Government.

The Euro has suffered from the concerns around what will happen in Germany and fell to 1.1722 versus the dollar and 1.1290 against Sterling. If fresh elections are held the performance of the right wing AfD will be the major focus following their surprisingly strong results in September.

Mrs Merkel may decide that the time has come for her to stand down given that she could no longer be able to influence the country as she once could. In a similar manner to Margaret Thatcher in the U.K. thirty years ago, Mrs Merkel has become outdated and lacking the foresight to carry the country into the next phase of its development.

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Forty Billion ransom offer for Single Market Membership

At a meeting of her Cabinet last evening, Prime Minister Theresa May appears to have managed to convince her colleagues that to clear the logjam that has developed in talks over Brexit, the U.K. should significantly increase its contribution to the EU budget following Brexit.

Hardened Brexiteers Boris Johnson, Michael Gove and Liam Fox had all said that they believed the U.K. should not pay any more than twenty billion pounds, but it seems they have been outflanked by Mrs May who now plans to offer forty billion. It is by no means certain that the EU will accept the new figure, but it certainly moved the two sides negotiating positions significantly closer. However, the issues of EU citizens’ rights in the U.K. following Brexit and the Irish border which have been largely ignored will also need to be found solutions for.

Sterling has reacted positively to the news rising to a week’s high against the single currency and reaching 1.3280 against the dollar, maintaining a run of six consecutive “up days”.

The EU has given an ultimatum of December 14th for provision of proposals for the “three issues” as there is a summit of Heads of Government that is slated to discuss the move to stage two of the talks. If that agreement is reached, it will provide the pound with a boost going into the New Year.

UK Budget to paper over cracks

It is hard to imagine Chancellor Philip Hammond producing a budget tomorrow that will provide both the stimulus the economy needs as it slowly shrinks towards recession and the impetus needed to encourage businesses to invest in their futures. It is a time for “battening down the hatches” both for the Government and business until there is a clearer path to Brexit.

Hammond will announce measures to increase house building, which will provide a long term boost to the economy, but they will be mostly cosmetic. He could provide business with some encouragement by tinkering with their tax bill but that would be very poorly received by the opposition and given the flimsy support the minority Government has, he may not wish to be too controversial.

Hammond (or his successor) will need to give a huge amount of thought to his next budget as the landscape will have changed completely by then. This will be the final full year budget before Brexit and it will be cast as such unable to provide any guidance on future spending plans while the negotiations continue. There will be questions about the supposed savings that were a major part of the Leave Campaign but those will only be realized once an agreement is reached over the budget contribution.