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.