Europe is on the brink — and it’s a measure of how fast-moving the crisis is that I must add the phrase “at time of writing”. By the time you read this, the brink may be well and truly in the rear-vision mirror. Three meetings were supposed to take place tomorrow in Europe (today our time) — one of Ecofin, the council of finance ministers of the 17 eurozone countries, and the other a summit of EU leaders.
The Ecofin meeting was supposed to authorise a detailed plan for preventing a catastrophic slide in the markets, created largely by bad news from Greece. The EU summit was added on, both to generate a sense that the union as a whole is dealing with the matter — and to put yet more pressure on Silvio Berlusconi, and Italy, to come up with a stimulus package.
Now the Ecofin meeting has been cancelled, for the simple reason that there is no package ready to go. The postponement of the meeting was announced on Tuesday afternoon, at which point the European sharemarket started to take a slide. Left without an Ecofin meeting to work to, the EU summit becomes the reverse of a confidence booster — it is simply another talking shop, whose powerlessness is laid bare. The third and most important of the meetings is at the German Bundestag, where the as-yet-unfinalised plan would be presented to German representatives.
The European debt crisis is nothing of the sort, of course. It’s a European banks’ debt crisis, the product of the union’s failure to deal decisively with Greece’s financial crisis, when it occurred. Rather than refloating Greece with sufficient funds from the EFSF, the country was part-bailed out, and then left to the tender mercies of the “troika” of IMF, European Commission and European Central Bank. The austerity imposed on the country was designed with one aim only — to reassure the markets that the country’s deficit spending wasn’t getting any worse.
But it has had the obvious and opposite effect. The Greek economy has contracted so strongly in the past year — by nearly 6% — that the shortfall in available funds could be anywhere between a quarter and half a trillion euros. Plugging that gap would require use of the entire existing EFSF, the common EU stability fund. At the other extreme, the banks could discount their demands and take a “haircut” of 60% — which would plunge the whole European, and then world, banking sector into crisis.
The Ecofin plan, when it is finally announced, will involve a measure of both — EFSF aid, a 40% haircut, plus a degree of bank “recapitalisation” — i.e. public funds bailing out private bank risks. Since the EFSF will itself need to be refinanced, there will be a double hit on European public funds. That the markets are willing to take a 40% writedown — double their offer four months ago — is a measure of the desperation about.
Greece is the immediate emergency — and it was the leaking of the troika’s latest report four days ago, that began this period of visible crisis — but Italy, more than Spain or Portugal, has become the next most urgent matter. Greece represents about 2.7% of the eurozone economy; Italy is closer to 17%. It is currently running a public debt of nearly €2 trillion, or about 110% of GDP (the actual figures vary by about 10% either way, depending on who you believe). But with Italy, the crisis is not merely of economics but of confidence — since no one has any idea that Berlusconi can deliver the required fiscal reforms, or even command a majority in parliament, with coalition partners the Northern League refusing to allow an increase in the retirement age.
The delay by Italy makes the creation of a full European recovery plan impossible — and that in turn is driving the markets down in the US. The obvious design flaw of the EU — that 17 separate sovereignties must run a single currency — is becoming the dominant feature of Europe. The structural impossibility of decisive action is creating a power vacuum, a strange sense of ennui and fatalism — Brussels drift. In that vacuum frivolity has flourished, a measure of the powerlessness of the principal players, and, increasingly, the contempt in which they are held by observers.
Thus Sarkozy’s and Merkel’s sniggering when asked whether they believe that Berlusconi can deliver a reform plan is taken as a significant moment, enraging Italy into nationalist fervour — and the question of whether it was Merkel’s response to Berlusconi’s remark that she was “unf-ckable” becomes relevant. Ah, but did Sarkozy chide her for eating two slices of cheese when she said she was on a diet? Did he express a desire to punch David Cameron in the mouth if he didn’t stop lecturing the eurozone? Was Berlusconi asleep through a whole meeting? Etc etc.
The tone is a measure of how genuinely powerless the leaders are, both before their parliaments and parties — Merkel will be praying that she does not get more than 19 rebels from her own side in the upcoming vote, as she will then have to rely on the SDP to carry it through — and in the face of the huge amounts of money required. For the search for a way to recapitalise the EFSF is now taking the EU to sovereign wealth funds — Qatar, China and Norway, a first payment on mortgaging the core European economy to other forces.
The crisis is now general, political and economic, and in that form has spread to Britain. David Cameron suffered one of the largest backbench rebellions on a referendum on EU membership, with 80 Tory dissidents voting in favour of one, against the government’s furious opposition. Less remarked on, but perhaps of greater importance was Bank of England head Mervyn King’s evidence to a Treasury select committee yesterday, in which he defended another £75 billion of quantitative easing/money printing, in the face of a 5-10% real inflation rate.
The move was unlikely to make banks more liable to lend money, he said. Indeed, they will probably become less likely to do so over the next months. But if they weren’t being pumped full of cash like a Christmas goose, the situation would be even worse than that.
So, the recession, which has never really departed, may now turn into a depression. Still, who knows. Who knows? In the interim, they may find a colony on the moon, who all want whatever it is that the Western world makes these days — wedding planners and credit default swaps, I guess — and capitalism will be saved! Let’s face it, it’s a more cogent plan than anything anyone else has put forward.
At time of writing.
At the time of writing:
Here is a concise summary of the requirements needed for a solution”
[(guardian.co.uk/business/2011/oct/25/discipline-haircuts-leaders-demands)
The eurozone’s biggest player and payer (Germany) wants a deal that does not involve increasing its €211bn (£185bn) contribution to the European Financial Stability Facility’s €780bn guarantees, does impose writedowns of at least 50% on private creditors to Greece and does not give an over-preponderant role to the ECB’s limitless funds for fear of stoking up inflation and reducing politicians’ primacy. Berlin seeks an outline agreement on the need for limited treaty change to allow EU authorities to discipline profligate eurozone members.
Ultimately, it wants a eurozone finance ministry within a fiscal union – and a federal state.]
Most of this can be achieved, though of course no single party will get their druthers. The above wish list is the German preference and the main thing they will not get is avoiding the ECB creating “limitless funds”, ie. the equivalent of quantitative easing (as GR noted, the UK Reserve Bank is doing it to the tune of £75 billion, so please David Cameron STFU.), ie. printing money. This will cause inflation and of course the Germans who are the biggest owners of real assets hate to see the value of it inflated away. But inflation is a key to the world’s deleverage from the absurd debt binge of the last few decades and there really is little choice (the other road is depression, end result almost certainly worse).
As to the last point, again the choices are stark. Either fiscal discipline is created (by whatever mechanism) or the Eurozone (and really the EU as we know it) will have to break up. The northern Europeans went into this adventure (EU and with all those med countries joining the Euro) knowing full well that there was bound to be trauma for the southerners; perhaps they were in denial it would not also create pain for themselves. But no pain, no gain. It was bound to happen and the only reason the developed economies have partly conquered the waves of recession/depression/stagflation from the 19th century to WW2 is the pain delivered by those events. We didn’t get there by innate wisdom. We were bludgeoned into it, amid great social distress and often massive armed conflict was involved. The southerners are in the middle of a very big learning event. True, the local politicians (Berlusconi, the Greek elites) do not seem up to the job but changing the politicians is part of the solution/learning event too.
Unlike Rundle who seems in a real panic (looking for lunar solutions), I am moderately optimistic about finding a path to a real solution. Observers who somehow expected all the parties required to agree (see wishlist) on the click of their fingers –say, 18 moonths ago– gonflé . But it looks like it is almost there and naturally, what else, it will happen at ten seconds to midnight. Or maybe even ten seconds after midnight.
That was supposed to be sont gonflé . Sorry but anglicisms just do not seem adequate. Roughly it means “full of themselves” or “full of it”. An alternative is Allez vous faire soigner! which is roughly “Go get yourself looked after”, or the commonly employed bloggism “Seek help”. (Take a Valium and stop bloviating.)
I am not sure I intend to fling that at GR because my main targets are all the experts and politicians stamping their feet and demanding the Europeans step up to the plate, yesterday or last year. I mean, La Gillard! And David bloody Cameron who lost 79 of his own party in a totally inconsequential eurovote yesterday (imagine if it was something that mattered?). And all those American financial wizards who created the whole over-leveraged mentality in the first place (and we won’t even mention Goldman Sachs re Greek debt); and the prez himself, with his $15 trillion of sovereign debt, much to the Chinese (At least most of the Euro debt is held by Europeans themselves) and their utter inability to create a sustainable balance between tax and spending, not to mention regulate Wall Street.
There is only one hope for more sensible financial rules and that lies with the Europeans, maybe with Chinese help. But of course with a destructive role by the Little Englanders who are frightened their financial conjuring tricks will be exposed to the light of day. Does anyone see any possibility of any meaningful change from the Americans? And Australians, what can one say? As I pointed out in my comment in yesterday’s CDM, we are actually more indebted per capita than the Greeks; do we really believe all those McMansions or harbourside tack is worth the price tags (and mortgages) on them? If the world crashes who is going to pay those prices, and keep up the mortgages (about half of the $1.2 trillion is foreign)? Nous sommes gonflé
we are on the brink of disaster, we must press on!.
The prospect of France accepting Germany’s proposal of a 50% haircut is less-than-rien. That would put their major banks, SG,BP,CA et al in receivership.
Which is where they should be but, as has been pointed out by WSJ & many others, the French government refuses to allow full scrutiny of the banks, never mind their own dodgy figures. Let us not forget which country was the first ot breach the 3% deficit limit within weeks of its solemn undertaking.
French duplicity may not be genetic but it is congenital.
@AR Posted Wednesday, 26 October 2011 at 4:17 pm |
we are on the brink of disaster, we must press on!.
Bah oui! Because with one great stride Jacques might be free! If they stop they will sink in the quagmire.
The French will agree. Their banks are going to receive a body blow whether this deal happens or not. If not, Greece really will have to unilaterally default (that’s 100% instead of 50%).
As to being secretive about their bank’s real status. Bof. You think anyone else is any better–the UK, Wall Street, even the Germans? (Once upon a time several French banks (Credit Agricole; Credit Lyonnais) were among the world’s biggest and strongest because of the French propensity to save. Alas they have allowed themselves to be infected by the dreaded AngloSaxon disease.)
Donc, monsieur AR, vous êtes gonflé.