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20th March 2010

The main focus in Europe remains on the debt woes in many European economies which is threatening recovery that is still fragile. Last week, the United Kingdom released its unemployment data and BoE minutes but eyes were on the deficit figures, as concerns remained in the euro zone on speculation Greece will not be bailed out!

In the U.K., unemployment data showed improvement to continue the wave of upbeat data released recently from the U.K. ILO unemployment for the three months ending January stood at 7.8%, where unemployed people fell by 33,000 to 2.45 million. Jobless claims surprisingly dropped 32.3 thousands to 1.59 million in February, the fastest pace since 1997, from the revised 5.3 thousands.


Labor market is ameliorating, where companies are shedding fewer employees after many of them had achieved better-than-expected results in 2009. The British economy benefited from the large amount of spending by government and the BoE; the fiscal and monetary measures managed to give a boost to the economy and pull it out of recession in the fourth quarter by growing 0.3% from 0.2% contraction in the third quarter.

BoE minutes for March showed that MPC members voted unanimously for pausing the APF program at 200 billion pounds and interest rate at 0.5%. There has been no split among MPC members since the three-way split seen in November. It is reasonable to say that the large debt and escalating prices prompted the BoE to pause their stimulus measures.

Inflation in January reached 3.5%, above the upper bound set by the BoE, while budget deficit has widened in February as seen by the data released last week. Government spending surpassed revenue by 12.4 billion pounds in March, yet better than median estimates of 14.0 billion pounds deficit. Besides, January's reading was revised to 43 million pounds from the preceding 4.3 billion pounds.

By extension, a gauge of cash in and out of the Treasury showed a 7.7 billion-pound shortfall from the previous month relative to the revised 12.0 surplus recorded in January, but the reading was also better than forecasts of 11 billion-pound shortfall.

The reading beat estimates as the reversal of the VAT in January to 17.5% from 15% caused tax receipt to increase at the fastest pace in nearly two years.

Nonetheless, the outlook remains fraught, especially as Moody’s announced that U.K. is moving “substantially” closer to losing their “AAA” credit rating based on rising cost for servicing their debt. U.K. will be spending 6% in 2010 and 9% in 2013, according to Moody’s.

By the same token, the European Union warned the British government of failing to reduce the deficit by 2015 to the 3% ceiling put by the EU. Britain's deficit is predicted to reach 12.1% of GDP this fiscal year of 2010-2011 before retreating to 4.7% of GDP by the fiscal year of 2014-2015.

However, the British government refused the EU Commission proposal to cut deficit more by withdrawing 25 billion pounds; it revealed the economy still needs help to fully recuperate from the most severe and synchronized recession since WWII.

In Greece, which has the highest debt in the EU, hopes that it will receive aid from the EU diminished as the week grew older; that was after the German chief finance spokesman for Angela Merkel said Greece should depend on aid from the IMF to trim its deficit.

Last week, EU finance ministers in their two-day meeting in Brussels decided to provide emergency loans for Greece without stating details of the rescue package, awaiting the final decision in the EU leaders summit on March 25-26.

However, after the German comments, skeptical overview is seen over Greece receive any financial assistance from the EU; especially that the German contribution is a key pillar to the aid and likely they will burden the biggest part of the price tag. Thus, it seems that Greece will have to seek aid from the IMF despite the disapproval of Trichet and Sarkozy who said previously that EU countries should solve their own problems.


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