Conventional wisdom dictates that we are imminently reaching high noon for the Euro. The assumption then is that the single currency will either collapse or the Eurozone will be forced to move rapidly towards full fiscal union. Recent experience suggests the road ahead may not be so straightforward, whatever assurances we hear about sorting things out ‘within six weeks’. It is quite feasible that we shall experience many more months of tottering along from market crisis to emergency meeting to fully-fledged conference and half-hearted bailouts to weaker Euro economies. Indeed, provided – and it is becoming the overwhelmingly big ‘if’ in this whole saga – the global bond market remains stable then the cheap price of government debt provides little incentive to create a viable long-term structure for our ailing continent’s economies. With the cost of borrowing this cheap why not continue to appease the Greeks, Portuguese et al? Let’s just avoid the day of reckoning with yet another quarterly elastoplast ‘solution’.
Purists may (rightly) bemoan that politics is being allowed to outweigh economic realities…for now. What is so dangerous about the utter lack of leadership or vision amongst Europe’s leading politicians is that the longer this crisis continues the more private sector confidence drains away and global markets discount the entire region. More crucial still is the risk that the two distinct problems that face struggling European economies, solvency and liquidity, become conflated. The Greek issue is simply one of solvency – or more accurately insolvency. It must be allowed to default, from within the Eurozone. Their creditors (predominantly EU banks) will need to take a substantial haircut. They lent the money at attractive interest rates (implicitly recognising the risks) and must now take the consequences. Although perhaps having hedged their position, the banking fraternity can spread the burden by triggering the exercise of those notorious credit default swaps. The IMF will need to take control of the Greek economy and in all probability we shall need to be on alert if order breaks down as the pain of extreme economic austerity takes effect.
The prospects for other struggling Euro economies are not, at the moment, so bleak. However, for so long as the nettle is not grasped by European leaders and finance ministers there is a real risk that the liquidity problems faced by Portugal, Ireland, Spain, and Italy, will become more deep seated. Difficult as it is for Angela Merkel in Germany, whose domestic political position appears ever more precarious, the EU’s economic powerhouse needs to cede control of this deepening crisis to the European Central Bank. The ECB’s mandate must now be to provide market intervention to maintain and restore confidence on behalf of all solvent Eurozone economies. Make no mistake, the politics of this will not be easy. It requires – as ever within the EU – bypassing democratic safeguards and potentially involves unfathomably vast quantities of central bank support with potentially hazardous medium-term economic consequences.
However, the twin lessons of the 1930s economic depression are that avoiding catastrophe requires swift action and once a process is underway not to worry unduly about overkill: better to pump too much, rather than inadequate amounts, of liquidity into the system. A financial system in freefall requires active central bank intervention, however irrational the collapse of market confidence. For all their faults Gordon Brown and Alistair Darling understood this three autumns ago.
Before the UK government becomes too enthusiastic in its promotion of a headlong move towards fiscal union in the Eurozone, it should perhaps be careful what it wishes for. Such a development (not that it is on the immediate agenda) would embolden the Eurozone to embark upon a rapid and radical political power-grab throughout the EU. Alarm bells should be ringing in the City of London, for whom this almost certainly spells bad news.
The complacent view from Whitehall is that any such emergency development in the Eurozone borne out of necessity would act to ringfence its weaknesses. History teaches us that an economic crisis is often regarded as too good an opportunity to waste for ambitious statesmen and bureaucrats who then impose a far-reaching political agenda. Recent talk of a transaction (Tobin) tax to be imposed throughout the EU to help underpin the Eurozone’s finance will only be the first such salvo.
As we are well aware dark economic clouds now hang over the EU and the Eurozone. For those of us whose instincts support the invisible hand of the market, there must also be recognition that financial markets are peculiarly prone to irrational panic. It is for this very reason that we have central banks, whose remit transcends party politicking. However, the onus must now be with politicians, from whom vision and decisive leadership is so sorely required.