Elections, Elephants, Economies, And VW Recovery: We Told You So

In the UK we are now in the final days of the election campaign to choose the next government. This election has been unique. For the first time ever in the UK, there have been live TV debates between the leaders of the three major political parties. In all three 90-minute TV debates, the elephant in the room has been what to do about the huge public sector debt taken onboard in 2009 to rescue the banking system from collapse. Four and a half hours later and all three main parties avoided spelling out to the UK electorate the true scale of the challenge the election victor will inherit on Friday this week.

But the elephant in the room is not simply a political issue in the UK alone, it has a real economic impact as the citizens of Greece are discovering at the moment. In most European countries, the public sector accounts for around 40% of activity in an economy, and the amounts borrowed by governments during the financial crisis are around 10% of GDP. With such large public sectors, it is difficult for governments to borrow against the taxation revenues. In the case of Greece the cost of borrowing soared forcing the government to secure loans from the IMF and EU. With a weak economic recovery across Europe, and with similar market concerns regarding government debt in Portugal, Spain, Italy, and Ireland, it looks like more uncertainty for Europe in the coming months.

Economic uncertainty in Europe is what I forecast in the blog Telecoms, the recovery, and 2010 - think Volkswagen I posted in November last year. To recap, I said there would be “.... a v-shaped recovery in the short term followed by a period of uncertainty (w-shaped)”. I labelled this a vw recovery. All the evidence from election campaigns and the latest economic developments suggest more of the same in Europe. Oh, and the elephant is still in the room.

Happy to discuss.

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