Will “Decades” Of Austerity Crush Britain ETF (EWU)?

by on June 7, 2010 | ETFs Mentioned:

David Cameron became the latest European leader to direct blame for the continent’s debt woes on his predecessor on Monday, declaring that Britain’s financial situation is “even worse than we thought” in preparing Britons for severe austerity measures to be rolled out in coming months. “How we deal with these things will affect our economy, our society — indeed our whole way of life,” said Cameron in a speech just north of London. “The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades, to come.” Repeatedly calling out the alleged failures of the Labour party, Cameron drew comparisons to leaders in Greece and Hungary, both of whom have attributed current budget woes to previous administrations. 

Britain isn’t a member of the euro zone, but the insulation from the beleaguered common currency has done little to reel in the budget deficit, which now stands at approximately 11% of GDP. Noting that the country is now spending more on interest payments than it is on running its own school system, the recently-elected Conservative party leader blamed “reckless” spending by the Labour government that was in power for 13 years before being ousted in last month’s elections.

Details of plans to reduce Britain’s $1.1 trillion in debt aren’t expected to be made public for more than two weeks, although Cameron dropped a few hints in Monday’s speech. “The government risks alienating Britons, particularly workers in the state sector, which Mr. Cameron singled out as an example of a public spending run amok,” writes Sarah Lyall.

UK ETF: Blows Keep Coming

Much of the attention directed towards Europe in recent months has focused on Greece and other members of the so-called “PIIGS” bloc of cash-strapped, high risk economies. But the iShares MSCI United Kingdom Index Fund (EWU) has been one of the worst performers in the Europe Equities ETFdb Category in recent weeks. In addition to the fallout from Europe’s budget woes, EWU has been one of the biggest losers from the devastating oil spill in the Gulf of Mexico; BP is the fund’s second largest holding, accounting for almost 8% of assets (see an x-ray look at EWU’s holdings).

Following closely-contested Parliamentary elections last month, there remains significant uncertainty in London over the ability of the coalition government to push through the “bitter medicine” needed to restore the country’s fiscal health. “With its grip on power untested, it will have to contend with critics on the right and left of both parties to get its spending plans through Parliament,” writes Lyall in the New York Times.

On June 22, Chancellor of the Exchequer George Osborne is expected to release an emergency budget that lays out the reductions needed to reduce the country’s ballooning budget deficit. Osborne has promised a “fundamental” review of government spending, a concept he is expected to lay out in greater detail this week. Osborne is reportedly relying on a model used successfully in Canada in the 1990s to build public support for the cuts.

Disclosure: No positions at time of writing.