Sunday 22 January 2017

Q&A: Market turmoil

Siobhan Creaton

Published 17/08/2011 | 05:00

What's going on? Why are the markets still in turmoil?

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News that the German economy has slowed down much faster than anyone expected has triggered fresh concerns about how the eurozone can weather the debt crisis.

It is a huge blow to see that Europe's powerhouse economy is now being affected by the problems in peripheral countries like Greece, Portugal and Ireland.

This bad news comes just a few days after the French economy said its growth had stalled, while the economies of Spain and Italy are only barely growing.

So the continuing debt crisis is weighing heavily across Europe now, and even Britain is worried the euro turmoil will further hurt its economy. This has unsettled the markets and gives investors less confidence about Europe's ability to tackle its debt problems.

Is everyone on holidays or are there any politicians dealing with the problem?

Europe's two most-powerful politicians, German Chancellor Angela Merkel and French President Nicolas Sarkozy, met in Paris to try to ease the euro's slide.

Did they come up with a solution?

No. While they stressed their commitment to strengthening the euro, their fresh proposals created even more confusion and sent the stock markets -- and the currency they are defending -- even lower.

What is their plan?

They surprised everyone when they said they were going to push to ensure that Europe's 17 economies, including Ireland, would be more closely integrated in the future.

This means they want to impose even tougher limits on each country's level of debt. Specifically they want every government to balance its books at the end of each year and to pass new laws -- which would involve changing the Irish Constitution -- that commits them to doing this.

And they want to set up a "euro council" headed by EU President Herman van Rompuy to oversee these changes.

Worryingly for Ireland, they also put the issue of corporation tax back on the table.

They said their two countries were preparing proposals to introduce a common tax on companies from the beginning of 2013.

And while for now it looks like this common tax rate will only apply to France and Germany, the danger is that it could mark the start of a fresh initiative to harmonise the rate that applies to companies in every European economy.

This would be disastrous for the Irish economy, which uses a low rate of corporation tax as a key attraction for multinationals to open new businesses here.

Ms Merkel and Mr Sarkozy also brought up the notion of a Europe-wide financial transaction tax, even though it was rejected by eurozone ministers last year.

Why have their proposals gone down so badly?

Well, much of what they have proposed hasn't got a realistic chance of ever happening.

Expecting 17 countries to change their constitutions to shackle them to a Franco/German debt target is a huge ask, and something that will be fiercely resisted.

So their proposals were disappointing and won't contribute much to solving the debt crisis; and because of this the euro fell even further.

The stock markets also all sank lower as investors reacted badly to the reheated proposal for a Europe-wide financial transaction tax, with bank stocks suffering the biggest losses.

Irish Independent

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