Getting closer to the greatest financial collapse in world history.
This is the Greatest Depression.
– Eurozone teeters on the verge of a ‘euroquake’ if Greek default is bungled (Telegraph, Oct 1, 2011):
More than one in three international investors expect a global economic meltdown within the next 12 months, according to a new Bloomberg poll. Far more – almost 70pc – say the world economy is deteriorating, up from just 18pc four months ago.
At the heart of the gloom, of course, is the eurozone, with 90pc of those surveyed judging that the economy of the single currency area is getting worse. One wonders what planet the other 10pc are on.
The eurozone is clearly sliding. The European Commission’s economic sentiment indicator fell to 95 in September, from 98.4 the month before, plunging at a rate not seen since the Lehman Brothers collapse. German retail sales dropped faster in August than at any time since May 2007.
The eurozone – an economy second in size only to the US – is on the brink of a double-dip recession.
This grim prognosis, though, is set against a more hideous backdrop – the danger of a “euro-quake”. Greece will default. The only question is how the default is managed – indeed, if it is managed at all.
A bungled Greek payment failure will spark “contagion”, as spooked creditors pull the plug on some big eurozone government, leading to non-payment of wages and benefits, serious social unrest, and a single currency break-up.
We face the very real prospect of a major economic shock, the negative impact of which will be felt around the world.
“The operational viability of the single currency won’t be known until the system is tested by a serious downturn and that moment may come soon,” this column warned in December 2007, as the credit crunch began to loom. “The ultimate victim of this sub-prime crisis could be nothing less than the single currency’s existence.”
When these words were written, many in Europe were feeling quite pleased with themselves. “Sub-prime” was America’s problem, caused by American excess. The eurozone would majestically sail on.
So as the 2008 meltdown came into view, those of us who observed that “every currency union in the history of man has broken up, unless, like the US and UK, it has been preceded by generations of political union, and held together with a federal tax system” continued to be dismissed as “mad”, “xenophonic” and “anti-European”.
I recall these writings not to be smug. I recall them because those who’ve ignored all previous warnings, waving them away by attacking the character of those making them, remain in charge of rescuing Europe from this mess. And they still don’t get it.
Far from feeling humbled, or contrite that their incoherent currency union is on the verge of disaster – a disaster which could trigger another global slump when we’ve yet to recover from the last one – the eurozone’s architects remain in denial, continuing to question the integrity of those who advocate straight-forward common sense.
Common sense now tells us that any “short-term fix” for the eurozone will do nothing to address the basic incompatibilities which have been there since monetary union began. Yet all the current proposals are just that, “extend and pretend” efforts to buy time in the hope that the single currency’s inherent contradictions will disappear given the requisite “political will”.
Many investors, too, have convinced themselves a quick and easy solution can be found, if only Europe “shows leadership” and governments “act decisively”. Equities rallied last Tuesday on leaked reports that a new, more powerful bail-out was near. That rally fizzled out Wednesday, when doubts emerged over the terms of the money Greece would receive.
Then, on Thursday, another rally, after the German Parliament approved Europe’s latest rescue package, a €450bn fund designed to keep the crisis from spreading beyond Greece and Portugal to “core” eurozone countries.
Such euphoria was based on nothing more than blind hope and desperation, namely the impending end of the third quarter, with traders determined to make their accounts look good, or less bad, in a bid to secure pre-Christmas bonuses.
Already, reality is once-again breaking through. For Thursday’s vote was on a package put together back in July, empowering the European Financial Stability Fund to buy bonds pre-emptively and recapitalise banks, but up to a limit that now looks paltry.
In the intervening months, the global downturn has sent debt and interest-payment trajectories rocketing. Spanish and Italian 10-year yields have been pushed above 6pc.
The EFSF that Germany just approved was inadequate in July and, in financial terms, now looks irrelevant. So, Germany goes through a massive political palpitation, agreeing to “this far and no further” measures after months of heated deliberation, resignations and constitutional court cases and all the package delivers is a mediocre half-day rally in a market desperate to hear good news.
To have any hope of covering the financing needs of Spain and Italy, the EFSF would need to be at least five times bigger than that just approved by Germany. This is basic arithmetic – and assumes, heroically in a rapidly escalating crisis, that sovereign yields stay where they are.
Anyone who thinks a pooled tax facility of that size is possible not only doesn’t understand the first thing about German politics, but doesn’t understand politics at all.
Europe’s policy-making “elite” wants a fully-blown fiscal union and sees this crisis as a way to get there. It is simply not going to happen, because almost no-one outside of the Brussels salons, or the broader EU establishment, wants it. That is the fundamental truth that must be spoken, repeatedly, to power – whatever offence is now caused. Because this currency union experiment, essentially an exercise in bureaucratic megalomania and hubristic nation-building, is about to do serious damage that extends way beyond Europe.
A smaller, stronger eurozone might work. For a while. If everyone sticks to the rules. Not that they will in the long-term, of course, because local electorates always take precedence. That’s how democracy works. But if the weaker, peripheral nations are now stripped-out, as their electorates want, the euro being reduced to a Franco-German rump, that would provide Europe with a 3-5 year pause for breath, allowing the global economy to recover, before the single currency is consigned, finally and irrevocably, to the dustbin of history.
The EFSF was, anyway, never the “final solution”. Proposals are now on the table for the European Central Bank to “lever up its assets to buy up troubled government debt from the financial system”. This is a euphemism for “quantitative easing”, with mainland Europe following the US and UK down the road of massive virtual money-printing.
So the ECB will bail-out bankrupt governments which, in turn, have bailed-out bankrupt banks. Writing-down debts? Too difficult. Restructuring banks? Er, no. The outcome, of course, will be inflation – fine for some savvy investors, but ghastly for ordinary people who have worked hard, saved, and tried to provide a dignified life for their families.
Those who deny that QE is inflationary tend to be those who said the eurozone could never break-up. Do these people ever read history? Inflation was how the Western world addressed its massive sovereign debts when they were last at today’s grotesque levels, after both the First and Second World Wars, albeit those debts were incurred for a rather more honorable purpose.
Inflation will be our response to today’s debts too – the debts of pure indulgence. It just goes to show, for all the technological advances of the last century, how little true progress we’ve made.
Liam Halligan is chief economist at Prosperity Capital Management .