After a very turbulent week financial markets bounced back yesterday as illustrated by the gain of around 4% by the FTSE 100. More encouraging is today’s calm as the same markets have held onto those gains.
The reason behind both this week’s gains and the previous weeks turbulence lies with the politicians as they struggle to deal with the Eurozone debt mountain.
Procrastination by politicians on all sides of the Atlantic has led to the crisis being deferred for a few weeks at a time. Inevitably this has led to the worldwide financial markets losing confidence in both politicians and Eurozone finance leaders. The worry is those same politicians and leaders haven’t grasped both the enormity and complexity of the situation and that they are unable to come up with a credible long term plan to deal with the debt.
In light of this, and last week’s falls in the stock markets, the Eurozone leaders sent out reassurances that they are now putting together some long term plans. This news alone was enough to lift markets.
As a sign that they are looking to the long term European Commission President Jose Manuel Barrosa today announced a new transactional tax on banks and the ultimate introduction of ‘Eurobonds’.
It is good news that the EC is looking ahead and starting to put together long term plans. That said, the Bank Tax needs to be adopted worldwide in order for it to work. In its current state the UK would veto any such taxation policy.
The Bank Tax as outlined would devastate the UK as around 80% of the tax raised would be taken from UK banks. Ultimately this would cause all our banks to move overseas to cheaper locations.
In summary the bounce in markets is welcome news. Whilst I am sure there will be further drops in financial markets in the weeks ahead it is good to see the political leaders looking beyond any temporary shoring up of the system. I feel confident that financial markets will respond favourably as long term plans are put into place.