Time is passing, uncertainty remains

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7 November 2011
Nicolas Michellod

The insurance industry is not immune from changes occurring at the marcroeconomic level. Based on our frequent and periodic discussions with European CIOs we have noticed that the level of uncertainty prevailing in the economy right now has contributed to reduce IT budgets (for more about this, read the following reports from Celent: Insurance in France 2011: The CIO Perspective and Insurance in the United Kingdom 2011: The CIO Perspective).

Much has been said and much has been proposed to solve the current Euro zone crisis initially triggered by the Greek sovereign debt issue during the first quarter of last year. But nothing and even the decisions made in the frame of multiple political meetings (G7, G20, etc.) prevented the issue to spread over to Ireland and Portugal later that same year. Nowadays, the Euro-zone is still in danger of disappearing - at least under its existing form - despite its member state political leaders’ latest decisions last week in the G20 in Cannes. Italy is the new country in the line of fire and it seems that as time passes, the problem is getting worse. I personally think there are three interesting lessons we can learn from this crisis:

  • Nations are here to stay: it is impossible to create a successful monetary union if the participating countries do not tend to form a single nation. On the first hand, the single Euro-currency decision makers have neglected this political aspect and on the other hand they have based the single currency construction almost solely on economic principles.
  • Democracy always wins: solidarity among countries part of the same currency zone works as long as there is the outlook of stable prices and sound future economic conditions. Manifestly this is not the case in these turbulent times. Directly or indirectly populations of France and Germany will let their politicians know that they do not agree to sacrifice their already decreasing well-being for other populations especially when some of them have been cheating to get funding from other members of the single currency area. According to me we might expect French citizens to express their anger before the next presidential elections through demonstrations against new public spending reduction plans to be announced in the coming weeks.
  • It is not recommended to solve a credit problem with more credit: it is Euro-zone member states who contribute to the European Financial Stability Facility (EFSF). In other words, Greece, Portugal and Ireland contribute to this fund at respectively 2.82%, 2.51% and 1.59% . Italy and Spain represent together almost 30% of the EFSF contribution. In other words, some countries are wrecked and rescuers in the same time!

In conclusion I think that we have reached a point where the magnitude of the Euro-zone problem is too big for policy makers ability to find a successful plan. To me the time has come to plan the end of the Euro-currency under its current form and the more we wait the more difficult it will be. For insurers, there is more uncertainty ahead. We are currently reaching out to UK and French CIOs to update our CIO survey reports. These two reports will be published in Q1 next year and I invite our subscribers to stay tuned.

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