IT'S LEGO BRICKS NOT BRICS

Thought you would like to see this Lego guide to the crisis in the eurozone, courtesy of JPMorgan:

1. The toreador in a floppy hat, and the F1 driver with his helmet, represent Spain, Italy and the rest of the Euro Periphery.
2. The three men with helmets, shields, and medieval weaponry represent the CDU, CSU and FDP parties in Germany.
3. The blue-and-white sailor boy is Finland.
4. The woman with an oversized carrot and her friend in overalls with a shovel represent the Social Democrats and Greens.
5. Wotan represents the Bundesbank.
6. The piggy bank is the IMF.
7. The grey-haired Banque chap is the ECB.
8. The chap in the red bib is Poland.
9. The artists are France.
10. The angry chef, the sweeper with a broom, the airline pilot, and the rest of the motley crew at bottom left, represent EU taxpayers in Core countries.
11. The storm troopers are the EU Commission and Euro Group Finance Ministers, chaired by Jose Manuel Barroso and Jean- Claude Juncker.
12. The monocled banker and his assistant are EU bondholders and shareholders.

SHIFTING SANDS

Isn't it always the way, you take your summer break and all-hell breaks loose, be it US downgrades, market runs or riots on the streets of London.

However, the roller-coaster still has some way to go. 

Last night, the Franco-German summit failed to convince markets that there was an action plan in place to save the eurozone, indeed, proposals were resurrected to put fear into the stock exchanges with financials particularly taking a hit this morning. 

As I have said before, a Tobin tax cannot work unilaterally. Money moves and in this electronic age money can move very quickly. Despite the individual costs being relatively low, it will add up and traders will shift to more friendly markets - in particular the burgeoning middle east bourses, I suspect will benefit, as will New York. 

From a UK political perspective, this raises an extremely interesting scenario. The Conservatives have, for the most part, successfully clamped down on the European argument in their own party which threatened to overwhelm them with an image of being a one-issue party. Also, despite being portrayed to the contrary, Labour is also riddled with divides over Europe, indeed until the mid-80s it was Labour that was vehemently opposed to European union. 

So the two biggest parties in the UK will find themselves in possible internal civil war with MPs from both the left and the right of the spectrum rising up against a further erosion of financial independence. The Lib-Dems will, inevitably, shift in the sand to the most politically convenient outcome for their party as personal manifestos make perfectly clear around the country, there is no real uniformed Lib-Dem policy, just convenient politicking. 

And yet the question remains of whether there is anything the government can do to stop this tax? The Lisbon Treaty is an enabling document, that is it can continually be changed to suit circumstances. However, it has yet to be fully tested so it will be interesting to see what, if anything, can happen if the UK becomes a blocking point.

The so-called lines-in-the-sand that all UK governments boast about are about to be swept up in the wave of European tax proposals and it could mean that the only solution is the one that all leaders fear, the eventual departure from the EU to the European Free Trade Area by the UK.

Implausible? Possibly. But when you consider that the Tobin tax would essentially tax London which is not in the eurozone to bailout the eurozone and possibly kill-off a key component of the UK economy, the question becomes one of what risks are more important to the politicians?

WELCOME ONBOARD

The rollercoaster that is the Eurozone looks set to pick up speed again as Moody's downgrades Portugal to 'junk' status.

Like some wheezing old carney ride on Coney Island, it drags itself up to the summit, only to risk diving once again into fears of default and contagion.

Now having one agency downgrade, is not in itself dangers - although the markets are positioning themselves accordingly this morning.

And Moody's said there was better political stability and will in Portugal than in Greece.

However, somewhere down the line those in control in the Eurozone really will have to ask what the payoff is between a political will to keep the Euro going and the financial costs that this is bringing on members?

EU WHAT?

The Eurocrats have done it again.

Showing a canny lack of logic, they have, to quote Baldrick, come up with a cunning plan.

At a time when the pips are being squeezed everywhere, the EU has proposed not only a rise of 5% in their budget but also a Tobin Tax.

Yep, one of the engines of recovery for Europe in the shapes of Frankfurt and the City are going to get hit by a trading tax.

Although the individual amounts may be miniscule it all soons adds up and do you think major players are going to keep full trading here rather than going to another country?

The problem with Tobin taxes is that they will never work unless all territories, and I mean all territories, adopt the tax.

If this goes through, the playing field has become extremely uneven for European players.

INTEREST-ING

Yesterday the head of the ECB, Jean-Claude Trichet, signalled that interest rates in the Eurozone will rise again to stem inflationary pressures.

In the UK, the interest rate is still at its record low as the country fights against a possible downturn coupled with the austerity programme.

So who has the right policy?

Clearly, in the UK, there is a high degree of inflating our debt away while cutting the deficit but what if inflation is trending? What will that do to consumer confidence? There is already clear signals that inflation is hitting the essentials - that is food and fuel - and the harvet forecasts look quite grim, possibly leading to further price hikes.

OK, so inflation is lower than the last quarter at 3.9% but can the UK survive with high prices and low growth?

Over in the Eurozone, things are less clear. Obviously tempering the heat will benefit Germany and the Netherlands but how will a strong Euro benefit those struggling in the periphery?

Finally,  there was an interesting comment by Jürgen Stark, Member of the Executive Board of the ECB,
at the “ECB and its Watchers XIII” conference in Frnakfurt today where he explicitly rejected the idea of relaxing monetary policy: "Easy money cannot and will not address the root causes of the crisis".

However, as always, there is a sting in this particular tail, I believe that to a degree Stark is right about easy money - as far as Germany and Netherlands are concerned - but as I, among others, have consistently said, for Ireland, Greece and Portugal, easy money is precisely what is needed to get them out of their morasses and they should not simply be dismissed as a "mere 6% of the euro area GDP" as EU President Herbert Van Rompuy did this morning. 

I'm sure those countries' "perspective" differs to that of the president.   

A MINISTRY OF FINANCE - REALLY?

Apologies but this is a gift that keeps on giving.

Greece is in a terrible state, Ireland and Portugal would dearly love some of that Quantative Easing that we and the States have indulged in and German is worried that its economy could overheat.

So not really the most ideal time to call for further centralised monetary controls and a ministry of finance is it Jean-Claude?