Eurozone problems a major worry for 2011

Commenting, he said: “Despite some reasonably encouraging news from the UK manufacturing sector over the last few months the fiscal tightening already announced will progressively impact on consumers and it makes no sense to tighten monetary policy yet, despite the probability that inflation will spike higher before falling back to the target range.

“One factor bound to push inflation up over the next couple of months is fuel prices, with petrol and diesel prices having moved sharply higher over the last month, even before next month’s VAT increase exacerbates the situation.

“Another major worry for 2011 is how the crisis in the Eurozone will impact on the UK economy. Now that the fundamental flaws in the Euro project have been so prominently exposed, those countries which promoted and joined the Euro experiment for political reasons but ignored the economic realities of life have a major challenge.

“It is difficult to see how the Euro can survive in its current form but all the potential solutions which have been proposed so far look extremely messy. Most will cause serious short term pain for many of the Eurozone participants and as over half of UK trade is with the Eurozone any negative impact on Eurozone economies will inevitably result in some fall out for the UK.

“With Germany now dictating terms for supporting each Eurozone country as the dominoes fall, Angela Merkel has managed to achieve peacefully, if one ignores riots, what Hitler ultimately failed to achieve by force – the domination of most of Europe!

“Bailing out Greece failed to stop the contagion and bailing out Ireland has actually made matters worse, with the contagion spreading beyond sovereign debt to corporate debt, including some banks, particularly Portuguese ones.

“As the markets continue to pick off one Eurozone country after another, with exposed banks ultimately having to write off more bad debts as “mark to make believe” accounting can no longer be used to hide the problems, the potential negative impact on the UK economy is very worrying.

“All this increases the likelihood that QE2 will need to sail next year.”