Public debt rising

The government wanted to reduce the level of annual government borrowing (the public sector borrowing requirement - PSBR) and reduce the proportion of government debt to GDP.

Last month the government borrowed £14.4 billion, well above the projections of the recent budget let alone the 2010 budget plan.

It now seems certain that the government will not meet its debt reduction or deficit reduction targets. But is this really important.

The arguments for deficit reduction are based on reducing the tax burden on the economy and keeping borrowing costs low (for example in Greece all borrowers pay very high interest rates because of the Greek governments excessive debts). That will aid long term growth.

The reason why the Governor of the Bank of England says it is okay to miss the debt targets is because of low growth world wide. If the world does not grow then the UK is unlikely to grow very quickly either. Therefore tax revenues are lower than expected and government spending is higher (on benefits for example).

Some people say that the government should spend even more to boost short-run growth. The same people ridicule the overshooting of the debt target. Am I the only one who finds that odd?

The Guardian explains the debt situation here

Keeping up with the Euro crisis

Keeping up with the saga of the Euro area crisis is becoming as confusing as watching every third episode of a spy series with a revolving cast.

Today the Germans voted to put extra funds into the 'bail out' fund for defaulting Euro members. Most people think this is nowhere near enough.

The Commission have proposed a tax on all financial transactions to create a 50 billion Euro fund to help pay for the bailout. But the British will never agree to this as it means the UK will be paying to prop up a currency they never joined.

The Euro was never an 'optimal currency area' and as the late Professor Pearce said 'It will never work'. Despite the best, if reluctant, efforts the Euro will probably not survive.

The BBC understand your angst at this long and drawn out affair and have produced a Q&A on the latest IMF/G20/EU proposal. This includes proposals to let Greece partially default which is seen as inevitable now.

The BBC Q&A is here

Dr Death suggests Greece default on its' debts

Dr Roubini (Dr Death) is renowned as one of the world's most pessimist Economists and has been credited with predicting the Global Financial Crisis in 2008. He has suggested that Greece default on their debt and leave the Euro.

His justification for this is because of advantage of floating exchange rates. He states that if Greece leaves the Euro and returns to the Drachma then they would be in a stronger position to recover. This is because a return to the Drachma would lead to a dramatic depreciation of the currency. This depreciation would improve competitiveness and growth.

A depreciation of a currency will make exports cheaper and imports more expensive therefore improving conditions for local producers. He also examines the success of Argentina and Iceland after they defaulted in 2001 and 2008 respectively to successfully recover.

His article is here

EuroZone

The inability of Greece to meet the required targets and the rising expectation that Greece will default has brought about a huge amount of speculation of what will happen next. The Daily Mail expects the "EU to be torn apart", the Telegraph views it as an opportunity to start again and design an EU that Britain would like to join and the Guardian warns Great Britain that this is going to hurt.

The last prediction is why these developments are so important. This is because over half of Great Britain's trade is with to Europe. Economically the relationship between the EuroZone and the United Kingdom is extremely close. The attached graph further justifies the close relationship between the two economies.

Watch the following connections to get a full understanding of the issues revolving around a Greek default.

http://www.youtube.com/watch?v=rrsGSvuBAi4&feature=player_embedded

http://www.youtube.com/watch?v=m-fWgT26rzs&feature=player_embedded#!

Greece! Should the euro stay?

Increasing the British government is becoming sceptical about Greece's ability to pay back its' public debt and has not attended the latest bailout meetings. The issue is: Can Greece be saved and is it worth saving? Few doubt that the failure of Greece will lead to lower growth in the Euro region (where over half of the UK exports are sold). However the bailout seems to be increasingly viewed as a simple delay tactic and that defaulting on the debt is unavoidable.

http://www.guardian.co.uk/politics/2011/jun/20/treasury-minister-faith-in-euro-falters