Where next for Europe?

Whatever Europe decides to do, says Merryn Somerset Webb - you can expect more misery.

We've been waiting for nearly a decade for the credit bubble and its consequences to play out. We've waited, and dipped in and out of various markets, through the commodity supercycle, the bull market in gold, various global property bubbles, the credit crunch itself and through the endless (and not over yet) rounds of quantitative easing (QE).

Now we're watching the slow implosion of the eurozone, thinking about what happens if Greece goes, and wondering if Europe will get deflation or inflation first. Right now, the seemingly obvious answer is deflation, that being the natural consequence of a broken banking system and a system that allows governments to run up debt, but won't allow their national banks to print up the payment of those debts.

But it's worth remembering that inflation and deflation aren't opposites. Instead, they are examples of the same thing (monetary instability) and both have as their oppositesthe same thing (monetary stability).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Jonathan Ruffer of Ruffer describes (more on him here)this well. Look at it, he said last year (see Independent-investor.com for the full interview), like a car driving along a straight road. A tyre blows out. That's the credit crunch. The car lurches to the left. That's deflation. The driver has the wheel, but with his tyre gone he has to end up in the left or the right ditch (deflation or inflation). Which is it? If you do nothing, "the deflationary events that are created by this dislocation mean that you are condemned to depression, as the bad drags down the good".

If you go the other way, pouring in liquidity to "fill the void", you make eventual inflation inevitable. In America it seems obvious which way things will go. The last time America was faced with the choice, it created the depression, "the iconic awful event of the 20th century". It won't go that way again: "if you are confronted with a rock and a hard place and the rock is the iconic event that must always be avoided, don't be surprised if you end up in the hard place".

In Europe, it isn't so simple: with so many different countries involved, there will always be a lot of argument about which is the rock and which the hard place. But given the political instability across Europe, the rising odds of Greece leaving the euro, and the arrival of Mr Hollande and his growth strategy' (or money-printing strategy, to give it a more realistic name), I think we have to assume that it won't be long before the eurozone also chooses the hard place.

While the German finance minister is still insisting Greece must "accept the conditions", Angela Merkel has been persuaded to say that she is prepared to "study the possibility of additional growth measures in Greece". I suspect she will be doing a lot of studying in the coming weeks. Then she will conclude that extra growth measures are a really good idea. Or at least better than letting Greece go.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.