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Markets await key decisions on interest rates and quantitative easing by the Bank of England and European Central Bank
Follow this link: Eurozone crisis live: decision day for Bank of England and ECB
As it was never envisaged that any country would leave the euro, the effects of such an exit would be felt worldwide
Deadlines have been set. Ultimatums have been delivered. The EU has given Cyprus until Monday to come up with €5.8bn to part fund its own bailout or have its financial lifeline cut off by the European Central Bank.
Unthinkable less than a week ago, the possibility of the eurozone losing one of its 17 members is now being discussed. Reuters reported that a meeting of eurozone officials openly canvassed the need to impose capital controls to insulate the rest of the single-currency club in the event of Cyprus leaving.
It was never envisaged that any country would ever leave the euro. There is therefore no template for an exit strategy that would prove painful for Cyprus and have potentially wide-ranging implications not just for the rest of Europe, but for the whole global economy.
The first stage of the process would involve the EU calling Cyprus’s bluff. At the moment, Cypriot banks are being supported by the European Central Bank’s Emergency Liquidity Assistance, which allows them to remain open for business. The moment the ECB pulls the plug, Cyprus’s banks will go bust. They have a €17bn cash shortfall, no equity and could raise only perhaps €2bn from forcing bondholders to take a haircut. The banks would shut and deposits would be worthless.
Stage two would involve the government in Nicosia re-introducing the Cypriot pound as legal tender. This would cause logistical difficulties, unless the government has stashed away piles of the old currency when it joined the euro five years ago. This seems unlikely, so the government would have to start printing new notes.
This would take time to organise and in the meantime the government would have to use euro notes re-denominated as Cypriot pounds. One way of doing this would be to over-print the notes in a distinctive way, as happened in Germany during its currency crisis in the 1920s. Nick Parsons, head of strategy at National Australia Bank said the capital controls on withdrawals from cashpoints would make this process simpler, since there would be fewer euros in circulation when the crunch came.
The government would then have to set an exchange rate for the Cypriot pound against the dollar and would probably set it at the level that existed before it entered the single currency. If the currency was allowed to float freely on the foreign exchanges, the pound would drop like a stone. If the authorities set a fixed exchange rate, the official value of the currency would bear not the slightest resemblance to its black market value. When Argentina abandoned its convertibility against the dollar in 2002, the peso depreciated by around 75% in the subsequent 15 months.
A plunging currency would lead to dearer imports, rising inflation and sharp cuts in living standards. The government would impose strict capital controls to prevent money leaving the country. It would also try to ensure that all transactions in euros ceased. Unofficially, the euro – along with other hard currencies such as the dollar – would circulate on the black market.
One additional problem would be whether contracts agreed in euros could be enforced. The concept of lex monetae means debts in euros would become debts in Cypriot pounds and settled at an exchange rate decided by the government in Nicosia.
So what are chances of this happening? Parsons says it is still unlikely but the risk is far greater than it was. He writes: “A few months ago I would have put the possibility of Cyprus leaving the euro at 1%. Today I would put it at about 30%.”
Protesters clash with police in Cyprus on Thursday as the country faces possible bankruptcy
See the original post here: Protesters in Cyprus clash with police after ECB ultimatum – video
Despite all their talk of rejecting the ‘old politics’, Nick Clegg’s party is now clearly part of the problem
They may be claiming Eastleigh as a great victory, and who can blame them? But the truth is that the Lib Dems lost 14% of their vote, compared to the 2010 election, which was exactly the same as the percentage of votes that the
The pressure of economic bad news is becoming so intense that banker is turning publicly upon banker – and even supposed panaceas such as rate-setting independence are in question
The outgoing governor of the Bank of England indulges in thinly disguised criticism of the views of his nominated successor, the Canadian Mark Carney. A former member of the Bank’s monetary policy committee – the American Adam Posen – conducts a manifestly undisguised assault on the centralised way in which Sir Mervyn King allegedly runs the Bank, having already on many occasions differed from him on policy.
And Jens Weidmann, president of Germany’s Bundesbank, says that Stephen King, the chief economist at HSBC, is “perhaps right” in forecasting the demise of that fashionable financial panacea of recent decades – central bank independence. Weidmann cites political interference with the independence of the Bank of Japan, among others.
Yes, central banks are under attack: and central bankers are taking pot-shots at one another.
King, who did more than any other British official to promulgate the adoption of “inflation-targeting”, made an impassioned plea last week for its preservation, including, in his speech in Belfast, a history of all those inflationary problems of the 1970s, and the long struggle to bring inflation down to tolerable rates.
In saying “tolerable” I am begging the question; but economic history shows that a moderate amount of inflation is a necessary condition for growth. Rip-roaring inflation is certainly not, and is socially destructive as well. But deflation – falling prices – is inimical to growth, as the recent experience of Japan has demonstrated.
In recent years King’s position has been an Augustinian one: the necessity of announcing inflation targets, but the desirability of not hitting them too soon, if at all.
By contrast, Carney has revived the idea of a target for nominal gross domestic product, a measure that is the sum of inflation and real growth.
People seem to have forgotten that, under chancellor Nigel Lawson, the Thatcher government tried targeting “money GDP” with pretty poor results. Carney could do well to study that excellent book The Economy Under Mrs Thatcher, 1979-1990, by the economist Christopher Johnson (who, sadly, died just before Christmas). As Johnson wrote, with the money supply statistics all over the place, “the use of money GDP created further confusion and was ineffective in controlling either real growth or inflation”.
Another book worthy of Carney’s attention is Inside The Bank of England: Memoirs of Christopher Dow, Chief Economist 1973-84, which has been long delayed, but whose publication last week turns out to be well timed.
Dow, who was on the frontlines when inflation was serious (25% in 1975) kept a diary – against the wishes of the governor of the time, Gordon Richardson, who, I am pretty certain, would have granted him a posthumous pardon if he had read this remarkable book. (That is, if they are not already discussing it up there in the great central bankers’ resting parlour in the sky.)
Richardson was governor from 1973 to 1983. He arrived at the Bank shortly after Dow had been appointed by the previous governor, Leslie O’Brien, and worked closely with Dow throughout, one of the latter’s self-appointed tasks being to try to keep Richardson’s flirtations with monetarism, and concerns about public sector borrowing, within reasonable bounds.
In their introduction to the memoirs, the economists Graham Hacche and Christopher Taylor, who worked for Dow, note that “the main worries for UK watchers when Dow entered the Bank were slower trend productivity growth than in other major economies, persistent balance of payment problems, and an upward trend in inflation”.
Plus ça change, although, as noted, inflation then was in another league. But, as now, it was a time of economic crisis – welcome to the party, Mr Carney – and, in addition to concerns about economic policy, Richardson and Dow spent much of their time trying to reform the Bank, a task which, the chancellor and the Treasury have made no secret about, is due to be embarked upon all over again under the leadership of Carney.
In a foreword to the book, Sir Kit McMahon, former deputy governor, says of the Bank in the mid-1970s: “The Bank’s organisation was ancient and creaking.” Not to put too fine a point upon it, that is what the Treasury thought when appointing Carney.
But if the Treasury thinks that by tinkering with monetary policy Carney will help it out of a fiscal hole, it may have another think coming. A sound Keynesian, Dow thought that the management of aggregate demand, with the object of maintaining high output and employment, depended mainly on fiscal policy. A contractionary fiscal policy – especially one of trying to cut the deficit at a time of depression – is hardly calculated to bring us out of depression, as a succession of GDP figures, including the latest 0.3% decline, have shown.
Thus, as Gordon Brown wrote recently in an article for Reuters: “The policy void today lies less in the weaknesses of national central bank leadership than in the reluctance of national governments to contemplate global leadership.” Brown demonstrated such leadership in 2008-09, both in his contribution to the rescue of the banking system and in coordinating the G20 economic stimulus in April 2009. Then came the austerity merchants, to, literally, devastating effect.
German chancellor’s move comes less than two weeks before prime minister’s landmark speech on European Union
David Cameron’s entire European strategy has been thrown into doubt less than two weeks before his landmark speech on the European Union as Germany backs away from initiating negotiations that would give Britain a chance to claw back some powers from the EU.
Amid growing German rhetoric against British Eurosceptics – including a warning that they are seeking to “blow up” the EU’s single market – diplomatic sources said Angela Merkel was abandoning plans to call for a major revision of EU treaties.
The chancellor’s move will come as a blow to the prime minister, who is expected to say in his long-awaited EU speech, due to be delivered in the Netherlands on 22 January, that he would use a major treaty revision to renegotiate the terms of British membership.
In common with every member state, Britain would have a veto in the negotiations which Cameron would use to create a new settlement. He would then put this to the British people in a referendum if he won the general election in 2015.
It is understood that Merkel, the only EU leader who has been calling for a revision of the Lisbon treaty to underpin new governance arrangements for the eurozone, has given up on the idea of a major treaty revision for the moment.
The German chancellor is said to have decided it is fruitless to push for a treaty revision in the face of strong opposition from France and elsewhere. Instead she has decided to try to stabilise the eurozone by setting up what are described as “work streams” in three areas. These cover banking union, the subject of the last EU summit where Cameron won guarantees for Britain; greater fiscal co-ordination among eurozone members; and labour market reform across the EU.
But Britain made it clear on Friday that it still expects an opportunity to renegotiate the terms of its membership when George Osborne warned that the UK might be forced to leave the EU if the existing settlement is left unchanged.
In an interview with the German newspaper Die Welt, which took place on Tuesday before a Merkel ally criticised the UK for seeking to “blackmail” its partners, Osborne said: “I very much hope that Britain remains a member of the EU. But in order that we can remain in the European Union, the EU must change.”
The Treasury confirmed that the translation of the interview was accurate, though a source played down the significance of the chancellor’s comments. “This is consistent with what we have said,” the source said. “We want to remain in the EU but the EU needs to change, and indeed is changing.”
But Germany is showing growing irritation with Britain. Georg Boomgaarden, the German ambassador to London, dismissed the Eurosceptics’ belief that Britain faces a choice between “pick-and-choose or out”.
The ambassador told the Guardian columnist Jonathan Freedland: “This is really a choice between out and out … If you pick and choose you blow up the single market.”
Boomgaarden’s intervention follows the warning by the chairman of the Bundestag’s European affairs committee, Gunther Krichbaum, that Britain should not seek to blackmail its EU partners.
Philip Gordon, the US assistant secretary for European affairs, spoke out against a referendum on Wednesday as he said that Washington wanted Britain to remain a “strong voice” in the EU.
The leader of the Conservative MEPs warned that strident Euroscepticism was in danger of giving the impression of Britain “snarling like a pitbull across the Channel”. Richard Ashworth told a seminar organised by the Business for New Europe group and the European parliament: “We’re raising the tempo so that expectations are becoming too great.” He warned that Britain was making itself “pretty unattractive and difficult to work with”.
Douglas Alexander, the shadow foreign secretary, said: “This week British business, then the Americans and then the Germans, joined a growing chorus of concern about the real risk of David Cameron pushing Britain towards exit from Europe. This is not a prime minister in control of the agenda, or even of his party. It is weakness and not principle that is now driving David Cameron’s thinking, yet sadly he seems intent on putting the unity of his party over the best interests of the country.
“Labour are clear that any decision on a referendum should be based on changes in Europe, not movements in the polls. We believe Britain’s interests are best served by focusing on reform in Europe, not exit from Europe.”
British officials are familiar with Merkel’s thinking on a treaty revision. They believe that after the European Central Bank’s success governor Mario Draghi in stabilising the euro, Merkel sees less urgency in formalising arrangements for a fiscal union.
But they believe the basic idea that eurozone governance arrangements will need greater democratic accountability underpinned in an EU treaty will eventually come to the fore again. “Europe is dealing with an existential crisis,” one British source said.
Vince Cable, the business secretary, showed Liberal Democrat unease about the prime minister’s plans which he described as a “massive disruption”. He said: “I have to say that this whole issue of raising again in a fundamental way British membership and the terms of membership is a massive disruption and deeply unhelpful in my job. I have to spend my time talking to business people, British and international, trying to have the confidence to invest here and create employment and the recent uncertainly is just deeply uncomfortable for the country. I think the warning shot across the bows yesterday from the United States was actually quite helpful as well as very timely.”
European leaders seal agreement to put the European Central Bank in supervisory authority over financial institutions in the single currency area
European leaders were expected to push ahead with plans for winding up or shoring up weak eurozone banks on Thursday night, hours after sealing agreement to put the European Central Bank in supervisory authority over financial institutions in the single currency area.
In what was being hailed as one of the most important and systemic responses in three years of battling to save the currency, finance ministers early on Thursday embarked on the first stage of a eurozone “banking union”, burying acute Franco-German differences to establish the first single banking supervisor.
A two-day summit which opened on Thursday sought to build on the momentum, discussing calls for new legislation on eurozone banks’ “resolution” to be drafted by next year.
But more ambitious schemes, drawn up by the summit chair, president Herman Van Rompuy, to move towards a eurozone fiscal and political federation were watered down and delayed amid strong German resistance to any pooling of risk and costs among the currency’s 17 countries.
A draft communique on the summit’s decisions said that a “single resolution authority will be required, with the necessary powers to ensure that any bank can be resolved with the appropriate tools.”
The European commission, according to the draft, was told to draw up legislation for dealing with weak banks over the next year and the law should come into force in 2014. There was also talk of a common eurozone deposit guarantee scheme, the third plank in the banking union scheme, safeguarding people’s savings anywhere in the single currency area.
The Germans are balking at that notion, however, and are also wary of pooling responsibility for weak banks in other countries as the common scheme would see German banks being taxed to pay for bad banks elsewhere.
“Common bank resolution is difficult for them,” said a senior diplomat, adding that the Dutch and the Finns, hawkish allies of the Germans on the euro crisis, were also reluctant to take on “mutualisation” of risk in the eurozone.
Berlin has told Brussels to steer clear of tabling proposals on eurozone risk-sharing and cost-sharing before chancellor Angela Merkel contests an election for a third term next September.
The proposed banks resolution regime is supposed to help cut the invidious link between failing banks and weak sovereigns that is seen as having contributed hugely to the sovereign debt crisis in countries such as Spain and Ireland.
“The single most important integrative step for the eurozone in 2013 is going to be the work to create a common resolution authority,” said Mujtaba Rahman, European analyst at Eurasia Group.
Under the single supervisory regime agreed on Thursday by finance ministers, though still to be finalised in talks with the European parliament, the ECB in Frankfurt is put in authority over up to 200 of the eurozone’s 6,000 banks initially. A German campaign to restrict the scope of the supervisor won over French resistance.
After more than 14 hours of fractious negotiations, the ministers agreed on the single supervisor as the first stage of a more comprehensive banking union. The next two stages may turn out to be more difficult to realise because of German-led reluctance to bow to the mutualisation of risk involved. But without them, it will also be difficult to see the new regime being effective, officials and diplomats say.
The idea was first proposed in June when France, Italy, and Spain exploited the euro drama to hijack Germany into agreeing that the eurozone’s bailout fund could be used to recapitalise directly ailing banks, say in Spain.
The Germans were arm-twisted into agreeing, but insisted the recapitalisation could only take place if eurozone banks were placed under ECB authority. Within hours of that huge concession, the Germans got cold feet and have been rowing back ever since, seeking to delay the bank supervisor and restrict its powers and scope.
It will be another 15 months before the new regime starts operating properly. Germany’s finance minister, Wolfgang Schäuble, ascribed the time needed to the ECB, stressing that Mario Draghi, the ECB president, wanted a year to get the new system up and running.
The UK chancellor, George Osborne, whose key aim from outside the eurozone was to safeguard the UK financial sector against ECB and eurozone interference by being automatically outvoted on rule changes, standards-setting, and regulation, claimed he got a good deal for Britain.
“The safeguards we have secured protect Britain’s interests and the integrity of the European single market,” said Osborne. “We’ve always said a banking union was a necessary part of a more stable single currency for the eurozone, but also that single market for the whole of the European Union must be safeguarded. The agreement Britain has secured does that.”
Despite the progress on common bank regulation, the summit shaped up to be a humiliation for Van Rompuy at the hands of the Germans. His earlier proposals for eurobonds have been scrapped and demands last week for a eurozone “fiscal capacity” or special budget and insurance scheme were also dropped, although the draft still talked of a eurozone “shock absorption capacity.” Van Rompuy’s first draft communique for the summit, envisaging a three-stage process towards a more complete monetary union, has had to be comprehensively rewritten while his proposals were belittled as a “useful input” rather than as the “basis” for the debate.
Merkel did not rule out supplying “financial incentives” for eurozone countries pledging to undertake structural reforms of their economies, policed by Brussels. But she added: “This should not be misunderstood. This can’t be used as a pretext for delivering new sources of money. That’s not on for Germany.”
The leaders also disbursed more than €34bn in bailout funds to Greece, six months after it was due, while postponing a decision on a bailout for Cyprus until next month.
EU, ECB and IMF introduced ‘unreasonable’ 11th-hour demands that were not part of deal Athens signed up for, claim officials
Greece’s relations with its international creditors were close to rock bottom on Tuesday when talks aimed at unlocking €31.5bn (£25.5bn) of aid for the debt-choked country were suspended amid unprecedented acrimony – despite late night efforts by both sides to dampen speculation that the negotiations had been derailed.
The breakdown, ahead of Thursday’s EU summit, followed the refusal by prime minister Antonis Samaras’ fragile coalition to endorse further labour reforms and wage cuts – moves that officials believe would be the tipping point for a society brought to the brink by more than two years of belt-tightening.
Tensions were heightened by the overriding sense that the EU and International Monetary Fund – which with the European Central Bank form the troika keeping the country afloat – were putting “unreasonable” demands on the table “at the eleventh hour”.
Officials claimed the conditions were not part of the deal when Athens signed up to its second €130bn bailout agreement in March. Many rejected the latest demands, which include drastically reducing severance pay, as tantamount to introducing labour conditions not unlike “those of the middle ages”.
The IMF mission chief to Greece, Poul Thomsen, tried to play down the spat saying “we agreed on most policy issues” after talks with finance minister Yiannis Stournaras. The Oxford-trained Stournaras said “open issues” remained but the government would make counter-proposals in the coming days.
Samaras’ junior coalition partners, however, appeared in no mood for compromise. “The troika demands feed galloping recession,” said Fotis Kouvelis, leader of the small Democratic Left party as he left talks earlier on Tuesday night with Samaras and his other coalition partner Evangelos Venizelos. “They exceed the endurance of Greek society.”
With public coffers set to run dry next month, the government needs agreement over the €13.5bn package of budget cuts and long-overdue structural reforms, otherwise Greece stands to lose a €31.5bn tranche of aid.
But with the country also mired in unprecedented recession, officials are digging in their heels over the need not to push the austerity-weary nation too far.
“We must conclude the measures but not haphazardly and not at any cost,” Venizelos, the socialist Pasok party leader, told reporters after the discussions.
The former finance minister accused the troika “of playing with fire and endangering Greece and the EU”.Instead of wishing to conclude the marathon negotiations lenders appeared bent on deliberately stalling the talks, he said.
“I asked the prime minister to make very clear the economic and social conditions of Greece at [Thursday's] summit to explain why these demands cannot be met.”
It will now be left to Samaras to explain the latest setback when he attends the EU summit, his first since assuming power in June. The conservative leader, who faces mounting opposition from unions and Greece’s increasingly vociferous “anti-bailout” front, had wanted to have the negotiations wrapped up when he flew to Brussels.
“You have to ask why they are doing this. Do they want to push Greece into a corner, do they want the government to fall, do they want to see the country default on its debt?” asked commentator Yiannis Pretenderis on Mega TV’s news programme. “It makes no sense at all. These questions have to be asked both in and outside Greece.”
In a clear bid to win goodwill ahead of the summit, the government announced on Tuesday that it planned to lease a string of state assets including the country’s biggest oil refiner and two largest ports as part of efforts to pay down debt and meet the conditions of its international bailout.
The best thing would be if the euro were smashed. The alternative is to see the flames lick higher
When he was leader of the Conservative party, William Hague once likened membership of the euro to being trapped in a burning building with no fire exit. It was an apt description, as young people in Greece would testify: in a country that has already contracted by more than Germany did during the Great Depression, the jobless rate for Greeks under 25 is 55%.
Little wonder then that Antonis Samaras, the prime minister of Greece, is warning that his country has been pushed to the limit and that there is, as with Weimar Germany, the risk of democracy collapsing.
Little wonder, either, that Spain, only just behind Greece in the youth unemployment misery stakes, is wary of seeking the help offered by the European Central Bank. Unlimited buying of Spanish bonds by the bank will come at a heavy price: more austerity for a population already buckling under the strain.
A study of hundreds of recessions dating from the 19th century shows that most are short, sharp affairs. They are like heavy colds, nasty but quickly over. Every now and then, however, the cold turns into something much more serious and the longer it lasts the more serious it gets.
It becomes more like a pandemic, affecting the immune systems of economies and spreading from one country to another. That is the situation in the eurozone today.
Activity is collapsing in Italy, is weakening fast in France, and has started to falter in Germany. Unemployment in the eurozone is at record levels as the recession starts to feed on itself. Collapsing demand leads to company failures, adding to the bad debt problems of already weak banks. These, in turn, call in loans and make credit harder to find. Government finances suffer, increasing pressure on finance ministries to find additional savings. Another chunk is taken out of demand, making it more difficult to cut budget deficits and the national debt.
Europe’s malaise is affecting the entire global economy. It is hampering an already tentative US economy and may result in Mitt Romney becoming US president. It is leading to slower growth in China, which in turn is leading to heightened trade tensions.
The eurozone has experienced weaker growth in the past decade than Japan did in its lost decade of the 1990s. The gap between the rich and poor countries has widened rather than narrowed. Before long, one in eight working age people will be on the dole. Flows of inward investment to what is increasingly seen as an economic backwater are starting to dry up. The failure of monetary union has been complete and abject.
In business this would not matter all that much. Enterprises fail all the time. The commercial world – with the egregious exception of the “too big to fail” banks – is run on empirical principles: companies that work tend to survive and thrive, while those that don’t fall by the wayside.
The single currency does not operate by empirical principles. If it did the plug would already have been pulled on it. It is a top-down project, with a lineage stretching back to the Enlightenment, in which technocrats come up with what they see as a blueprint for happiness: clear, rational and beautiful. When the blueprint does not deliver the expected results, that is not the fault of the plan.
As made clear this year by the ECB president, Mario Draghi, the future of the euro is not open to negotiation: Europe could have a second or even a third lost decade and it would make no difference to those who think it the last word in modernity.
A second lost decade is certainly in prospect. The International Monetary Fund’s World Economic Outlook tells the cautionary tale of British economic policy after the first world war, which was similar in many respects to the way the eurozone manages affairs today. When the guns fell silent in November 1918 the UK found the national debt had ballooned to more than 140% of GDP and prices were double their pre-war level. The government had two priorities: to return the pound eventually to the gold standard at its 1914 exchange rate and to cut national debt.
The upshot was that both monetary policy (interest rates and the exchange rate) and fiscal policy (taxes and spending) were kept tight. Interest rates were raised to 7% in 1920 and throughout the 1920s the Treasury ran primary budget surpluses (excluding interest payments on the national debt) of nearly 7% of national output.
Just as in the eurozone today, great store was put on the notion of an internal devaluation. Britain had become less competitive but could price itself back into global markets through cuts in wages and prices. But as the IMF study notes: “The combination of tight monetary and tight fiscal policy, aimed at significantly reducing the price level and returning to the pre-war parity, had disastrous outcomes.
“Unemployment was high, growth was low, and, most relevant, debt continued to grow. Although the price-level reduction the UK was attempting to achieve was larger than anything likely to happen today due to internal devaluation, similar dynamics are evident.”
In some respects, the policy regime in the eurozone today is far less draconian than in 1920s Britain. Short-term interest rates have been cut, the ECB has flooded the financial system with cash and it will buy sovereign bonds, albeit with strings attached.
In other ways, though, it is the gold standard with knobs on. The standard was, in theory at least, a self-stabilising mechanism, since those countries that ran trade surpluses accumulated gold. This led to an expansion of credit, which in turn led to higher inflation, a drop in competitiveness and a narrowing trade surplus. Today’s euro has no such mechanism to force the biggest creditor nation (Germany) to run down its colossal surpluses.
The gold standard collapsed in the 1930s amid great economic pressure and Britain was the first country to leave. For those who view the euro with almost religious reverence, the idea that monetary union could go the same way is inconceivable.
Let’s hope they are wrong. The best thing for Europe would be if the euro were smashed to smithereens, allowing countries to devalue and impose capital controls. It would still be painful but at least they have the ability to boost their economies and pay down debts more slowly. The alternative is to sit and watch the flames lick higher.
The imaginative and astute ECB leader has lived up to his side of the bargain, but his plan is wrong-headed and insufficient
On Thursday afternoon the fate of the entire 17-member eurozone rested on the shoulders of one man: Mario Draghi. That such an assertion can be made – without the umistakable smack of hyperbole – surely shows what trouble the euro project is now in. Because no matter how innovative or bold Mr Draghi’s response – and it was undoubtedly both – the success or failure of a currency, a single market, and a political project should never be in the gift of an unelected central banker and his equally unelected colleagues.
Yet throughout the panic and denial and firefighting of the past couple of years, two major trends in European policy-making are observable: first, economic power in the continent has shifted away from national governments and towards the European Central Bank; second, and this is surely related, European politicians and policymakers have omitted to make the case for why the euro should exist at all. Instead they assert that the euro must continue – “whatever it takes“, as Mr Draghi said this summer – or they conflate austerity with the euro with Europe, as Angela Merkel repeatedly does. The result is that what has to be a grand, cross-national political project if it is to survive at all is no such thing; it is becoming ever more an elite project that is only able to endure at the costs of those lower down in society, especially in southern Europe. For those at the top: officially granted liquidity. For those at the bottom: unnegotiable austerity.
The announcement by Mr Draghi fits neatly into this pattern. The new plan to rescue the euro sounds complicated, but it really boils down to one thing: a guarantee that nations struggling to raise funds from financial markets will be helped out by the ECB. The scheme even has a name: outright monetary transactions, or OMT, or, as wags dubbed it, on my tab – since that is effectively what Mr Draghi is now offering the rest of the euro club, to put the mother of all credit cards behind the bar. The net result will be to wreck the ECB’s balance sheet, but along the way there will also be strict austerity conditions. Before digging into the problems with this latest solution, one big acknowledgment must be made: this is about as big a step as the ECB could have taken.
The previous boss of Frankfurt, Jean-Claude Trichet, would barely have dreamed up such a scheme, let alone pushed it through. It is clear too that Germany has been forced to go along with this: it was as good as admitted that the Bundesbank opposed this scheme – a rather crucial no vote, given that it is the Germans who will have to act as paymasters-in-chief. In his imaginativeness and political astuteness, Mr Draghi has lived up to his side of the bargain to do “whatever it takes”. Yet the plan, in its insistence on austerity conditions, is wrong-headed and, in total, not enough. The debt problems for Spain and Italy have worsened partly as a result of their economies slowing down: so strong-arming them into making ever more spending cuts will just intensify the death spiral. If you want a parallel, just look at George Osborne’s double-dip recession, created with a very similar mix of “fiscal conservatism and monetary activism”. As the chancellor has found, even after Mervyn King has thrown the best part of £400bn at the economy, a recovery can’t be rustled up to order. Nor can spending cuts: just ask Madrid, which is having to bail out stricken provinces left, right and centre.
This argument should remind us of just how multifaceted the eurozone’s problems are. There is the huge and pressing issue of the financing of Spanish and Italian government (and bank) debt; which Mr Draghi has tried to sort out. But then there is the economic problem of a whole chunk of the continent now heading deep into recession – and taking the rest down with it. There is the political problem of forcing cuts on voters. Finally, there is the biggest issue of all: of why exactly this configuration of the euro should be saved at all. On that last point, certainly, Mr Draghi won’t be able to help.