Saving the Euro Bumblebee  03 Aug 2012

As the effects of the Eurozone crisis begin to show in the rest of the world economy, European leaders have expressed their determination to stand by the Euro.

Action is expected from the European Central Bank, and its president Mario Draghi, who in a speech at the British Business Embassy Global Investment Conference, timed to coincide with the London 2012 Olympics, likened the Euro to a bumblebee, which had difficulty flying and needed to ‘graduate into a real bee’.

World Economies Affected by Eurozone Crisis

The Eurozone crisis has caused growth to slow in many economies across the world.

In China growth has slowed, leading to interest rates being cut and a vast stimulus being prepared.

In the US, which has a debt problem of its own, growth has also slowed in part due to the Eurozone crisis. US Treasury Secretary Tim Geithner travelled to Germany to meet with Finance Minister Wolfgang Schaeuble, where they urged co-operation in the fight against the debt crisis. President Barack Obama telephoned Italian Prime Minister Mario Monti to offer “support for decisive action”.

European Leaders’ Determination

European leaders have been united in their determination to support the single currency. German Chancellor Angela Merkel, Italian Prime Minister Mario Monti and French President Francois Hollande have all issued upbeat statements pledging to do everything possible to save the Euro.

The Eurozone Crisis is putting pressure on the member countries of the Eurozone:

Germany with its AAA credit rating under threat, and being opposed to bond buying by the European Central Bank, must decide if they really want to save the Euro.

Greece is facing the prospect of its cash reserves running dry on 20th August, and the possibility of having to leave the Eurozone.

Spain’s cost of borrowing is rising to unsustainable levels and is coming under pressure to accept a bailout from the European Central Bank.

Looking to the European Central Bank

Mario Draghi compared the Euro to a Bumblebee.

All are now looking to the European Central Bank, and its president Mario Draghi, for a solution. Mr Draghi boosted the confidence of the markets when he said that the Euro is ‘irreversible’ and that the ECB would do ‘whatever it takes’ to save the Euro. In a speech at the Global Investment Conference in London, he compared the Euro to a bumblebee:

“And the first thing that came to mind was something that people said many years ago and then stopped saying it: The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate into a real bee. And that’s what it’s doing."

As markets waited to see what measures the ECB would take, and whether these would include bond buying, to which Germany is opposed, Mr Draghi pledged that “the European Central Bank will draw up a mechanism in the coming weeks to make outright purchases to stabilise stressed euro zone borrowing costs”. This disappointed traders and investors who expected immediate action, but some analysts were more positive.

UK Recession Deepens

In the UK the ‘bee’ that needs saving is economic growth. Latest official figures revealed that the UK economy shrank by a bigger than expected 0.7%, and has been in recession for a third successive quarter, there being one quarter more of negative growth than the two months which signifies a recession.

The UK’s austerity measures have remained largely on track. Standard and Poor’s have confirmed that the UK will keep its AAA credit rating, which is described as stable.

The deepening recession in the UK has led to heavy criticism of the government, which defended its policies and continued efforts to support business.

British Prime Minister David Cameron admitted that the Government needs to do more to rescue the economy and emphasised the expected £13 billion of benefits to business and the economy of the London Olympics. Speaking at the ‘British Business Embassy’ Global Investment Conference, timed to coincide with the Olympics, he defended the UK’s economic policies, saying that government had acted decisively to restore confidence in its public finances.

Chancellor George Osborne, who has come under criticism for the continuing recession, said ‘we must focus relentlessly on the economy’. Speaking at the ‘British Business Embassy’ Global Investment Conference he said that ‘Britain is back open for business’.

The Bank of England, which has also come under pressure to do more to stimulate the economy, decided no change was necessary to interest rates or to the £50 billion quantitative easing programme which was announced in the previous month.

The £80 billion Funding for Lending Scheme announced by the Bank of England last month has come into operation. It is "designed to incentivise banks and building societies to boost their lending to UK households and non-financial companies".

Olympics Boost

The benefits to the UK economy of the London Olympics have been varied. Some have described a ‘ghost town effect’, that fewer tourists are visiting the West End of London, and workers who have been warned to avoid travelling during the games have been working from home. Government Minister Jeremy Hunt said that the games are the best gift London businesses could ask for, while London Mayor Boris Johnson admitted the effects have been patchy. One of the highlights is the ‘British Business Embassy’ Global Investment Conference, timed to coincide with the Olympics, at which many of the most influential people in global business and economics have been present.

Another investment conference connected with the Olympics took place, entitled ‘The Future Starts Here: The Cambridge Phenomenon 50th Anniversary Conference’, in which elite US venture fund managers from the US as well as Britain met with business leaders and entrepreneurs in Cambridge, which is the UK’s and Europe’s ‘most productive technology cluster’.

Making a Bumblebee Fly

Mario Draghi spoke of the Euro being like a bumblebee, which must graduate into being a real bee. Some time, planning, consultation, agreement and effort will be needed before that can become a reality.

In the same way, if you have a product or business venture which appears to be failing, according to proponents of the ‘Lean Startup’ methodology, it may be a good idea which needs reworking to make it a success.

Honey Bee or Bumblebee?

How can you tell if the business you are thinking of investing in or trading with is a ‘bumblebee’ or a ‘honey bee’? In other words, how likely is the venture involving this business to pay off?

To determine this you need information about the profitability and creditworthiness of the company.

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Posted in bizzy blog on 03 Aug 2012.