"History is a nightmare from which I am trying to awake"
 
Putting these words into the mouth of Stephen Dedalus in 1922, Irish author James Joyce was referring to the ability of literature - and art in all its forms - to keep a trace of history's tragedies for people and nations to look back on. The Irish public now has reason to cite Joyce's prescience given the financial and economic misery into which the country has been plunged. The Celtic tiger is on its knees. Not because of the government's fecklessness in fiscal matters, as was the case in Greece, but due to a private banking system that spent too long flagrantly abusing the credit facilities offered by some rather careless investors. Those wanting to restrict the application of new rules on the public sector should remember that in 2007, just before the crisis, Ireland's public debt was just 12% of GDP compared with 27% in Spain, 50% in Germany and - even then - 80% in Greece.

Ireland's problem today stems from the leverage of its banking system. Here too, it should be noted that in July Irish banks passed the famous stress tests, as did 84 of the 91 participating European banks. For example, the tier 1 capital ratios of Allied Irish Bank and Bank of Ireland were 6.5% and 7.1% respectively. What was the point? The Greek firewall lasted no more than one summer while the Irish sea storm led to an €85 billion bailout with an additional problem of a political nature. The money released by the European Union (EFSM and EFSF) and the IMF is not being used to refill the state coffers but rather, indirectly, to rescue the banking system. Will this respite in the eurozone crisis last? We suspect not. Attention could be switching to Portugal very soon. And then what? The Spanish flu? We cannot rule it out.

We welcome the efforts of the Zapatero government, which managed to reduce its country's budget deficit by nearly 47% in the first 10 months of 2010 compared with the same period in 2009. But this may not be enough. Spain is a difficult country to reform (something that France knows all about) due to the relative independence of the 17 autonomous provinces whose finances have been weakened by the crisis. As in Ireland, the problem stems from excessive leverage in the private sector. On top of that, investors have abandoned ship. Especially since the 18th of October when Angela Merkel and Nicolas Sarkozy reached an agreement obliging private investors to play their part in the crisis resolution mechanism. Now, Germany is being criticised for going it alone. Drawing attention to poor risk management, which under the cover of a single currency and identical ratings led investors to unremittingly finance Greece, Ireland, Portugal and Germany without discrimination, is a matter of public health. Otmar Issing was right to remind us of this in a recent Financial Times article. Germany is therefore doubtful about any future bailout.
Alas, the European crisis is not over. It cannot be resolved by Jean-Claude Trichet and Dominique Strauss-Kahn alone. That is quite simply impossible. It requires political will from our leaders. A determination that will have to come from Germany if a large country is affected, at which point Germany will not hesitate to get involved politically, eventually allowing itself to be "coaxed' into it. Because Greece, Ireland and Portugal combined account for just 6% of GDP and 8.5% of banking assets in the eurozone. With more than 10% of GDP and 10.8% of banking assets, Spain is a serious case. There is already talk about Italy whose debt stands at 120% of GDP, but what about France and its confidence in its own credit rating? With a current account deficit of nearly 4% of GDP, Brussels forecasting a budget deficit of 6.3% of GDP in 2011 (vs. 2.7% for Germany) and growth of 1.6% (vs. nearly 2% for Germany), France should not be too haughty - especially as it has not recorded a single budget surplus since 1973.

The crisis has not yet been resolved and, in the competition for the least attractive currency, the euro is once again in the lead. Economic growth In the eurozone will remain sluggish in 2011 and Germany, which is hoping to rebalance its budget in 2016, will continue to exert deflationary pressure on its neighbours. In this context, and given the absence of a US-style monetary response from the ECB, our positioning in the eurozone will remain prudent, even on equities, despite relatively low valuations and a significant underperformance by some markets in this time of high volatility. We will continue to favour companies that will benefit from stronger growth in the United States and emerging countries.
Quantitative easing is making good progress in the US. At the beginning of the month, one might have wondered about the wisdom of this further $600 billion.