Euro crisis: not on my patch (Guardian Editorial)

[Ghost Dog]

... Even if it could get around treaty provisions and challenges in the German courts, making the European Central Bank a lender of last resort or a backstop for the bloc's bailout fund still seems to be a gamble Germany is reluctant to take. Germany is the biggest contributor to the ECB's capital and the Bundesbank the biggest of a network of central banks which conduct most of its business. If Italian and Spanish bonds were written down in the way Greek ones were (the ECB already holds 20% of Greek, Portuguese and Irish debt), German taxpayers could have to recapitalise the bank. The implicit promise made to Germany when it abandoned its currency was that the new bank would never be used to bail out overindebted nations. Mr Cameron's resistance to a tax which targets investment banking, one of the few British industries left standing (85% of the yield would come from the City of London), is just as instinctive. Which British leader – let alone one who heads a eurosceptic party – would risk headlines like "Cameron sacrifices City to save Greece".

And yet without a resolution to this crisis, the contagion of panic will merely spread higher up the food chain. Take Spain's position. It has already taken the austerity pill: civil service pay has been cut, the age of retirement has risen. It was on course to meet its deficit target. And then the markets struck again, pushing the price of 10-year bonds to 6.97%. While Spain has a lower debt to GDP ratio than the eurozone average, its banks are still full of toxic assets – the loans to builders and developers in Spain's broken property boom, whose projects are now being written down. 700,000 new homes remain unsold. The economy has probably already slipped back into recession, so Spain is now trapped in a downward spiral of private debt, austerity, high unemployment and threats to banking solvency...

... Time is running out. Europe's leaders can not defer the solution indefinitely. Beijing will not bail them out, nor will the IMF. However it is formed, the euro is likely to need a fiscal fund, or something that functions very much like one. You cannot have a single currency without a treasury, or a fully empowered central bank behind it. Ms Merkel's policy of doing just enough, just in time, is looking unfit for purpose. This is no longer a debt crisis, restricted to Europe's southern periphery, but an economic crisis affecting the whole of Europe. Britain must do more to hasten the solution than yell incoherent encouragement from the terraces. If European banks stop lending to each other, as looks likely, the City will find itself caught in a second credit crunch...

/... http://www.guardian.co.uk/business/2011/nov/18/euro-crisis-editorial


Of course, the line "Cameron sacrifices City to save Greece" could read "Cameron cleans up City and contributes to EU stability." It all depends on the way the Media spins it, because thus do most of the politicos' voters (unthinkingly) think.

[Ghost Dog]

1. Worth repeating these instructive edited remarks from the comments

to this article, for those watching Europe:

The Uk should be worried looking at the huge debt it has compared to other countries, some 100k per person and owing Spain 316 billion euros which is most of Spain's actual bond debt. Yet the markets stay off the Uk and attack Spain, Why? Because the Bond market is attacking from the UK and doesn't want the battle focussing on the UK.

Germany knows this of course and uses it as leverage to annoy Cameron. The UK is a lot more in the shit than they let on. Hence the big dash for some cash from Northern Rock.

Cameron's harping on about treaty changes etc. will only act as a smoke screen for a while. The Autumn budget will have to hide as much of the truth to the public as possible.


Response


Not exactly true. The bond market has no allegiance to any country, it simply makes its judgments on the basis of risk.

UK gilt yields are kept low because...

(a) the BoE can buy them up if demand is low - kind of like the ECB purchases of Spanish debt, but the BoE has the advantage of being able to crank out as much funny money as it likes and buy as much as is necessary,

(b) the UK is a zero default risk - as a sovereign power we can, in extremis, crank out as much fresh currency as we like to repay our debts. If it ever came to such a dire situation then the payments would be severely devalued and the inflationary cost to the country would be dreadful, but at least the investors would get something back, and

(c) because of our ability to devalue we don't risk being trapped in the same kind of debt-deflation spiral as the peripheral Euro states, which are lumbered with an overvalued currency and no control over their interest rates, so we have a better chance of recovery in the medium term

This doesn't mean that the UK is safe. Very far from it. Everything depends, of course, on what happens next in the Euro debt crisis. If things continue to deteriorate and France falls then we're probably the next domino after them. If France manages to stay standing, either through her own efforts or through being rescued by Germany, then the long-awaited firewall will have come into being and we may continue to benefit from low yields indefinitely.

[bemildred]

2. Let them all fail, Europe needs a fresh start.

These governments have been screwing their own public and the rest of the planet long enough. Their threat that they might fall is an empty one, they are useless when they are not pernicious. The ones that will survive are the ones we need to emulate, the rest are welcome to the dustbin of history where they belong.

[bhikkhu]

3. If you're familiar with the Gini Index, Europe is one of most "equal" places on earth

...is a map of the world rated on the index, which basically measures how equal income distribution is. (you can read about it here: http://en.wikipedia.org/wiki/Gini_coefficient). In a country such as Sweden (dark green on the map) the distribution of wealth is pretty even between the rich and the poor - shown in this image:



...talked about here: http://daughternumberthree.blogspot.com/2010/10/unequal-american-pie.html

I'd rather not see Europe fail, as - at least here - that would be "proof positive" for one party, at least, that equality is unworkable and inevitably fails. I thinks its too easy to think everywhere is like here, and that everyone shares our problem. We have backed ourselves into a fairly unique and miserable corner as far as the rich vs. the poor thing, while Europe has been generally well governed, but now facing serious pains due to what may be called "the end of economic growth" due to global resource limitations.

[Ghost Dog]

4. Brilliant way to put it, thanks.