More than a euro crisis
by Dan Roberts
Originally posted guardian.co.uk, Friday 14 May 2010
WITH TALK OF THE BREAK-UP OF THE SINGLE CURRENCY, GLOBAL FINANCIAL STRIFE MAY BE JUST BEGINNING. France threatens to leave the euro. German savers hoard gold. The Bundesbank works on a plan B to restore the Deutsche Mark. It’s fair to say even a $1 trillion bailout hasn’t been enough to stop the rumour mill dogging the European single currency this week.
How much truth there is to these rumours we’ll probably never know. The Elysée was predictably playing down reports of Nicolas Sarkozy’s threat yesterday. A spike in gold prices to more than €1,000 an ounce can only be partly due to Germans buying gold coins, and if the Bundesbank does have a plan B, it won’t be telling the blogosphere first.
But, for once, the conspiracy theorists may not be entirely off beam. The trouble with Europe’s debt crisis is the same as the debt crisis everywhere: it just won’t go away. And until it does, the future of the euro remains as uncertain as the rest of the global financial system.
The Europe Union has responded to member states like Greece that can’t afford to pay their debts in the same way world leaders responded to a crisis among bankrupt banks – by lending them more money. It doesn’t take a financial genius to work out that this can only ever buy time.
All the while, political protests rise. Last week riots in Athens killed three people. This week police blamed left-wing militants for planting two bombs. Across Europe, voters are either asking why they should be asked to pay for the rescue package, worrying whether they might be next to need one – or both.
Paul Volcker, president Obama’s top financial adviser, sounded particularly gloomy this week. Speaking at a lunch in London, he questioned whether political camaraderie in Europe was strong enough to contain these centrifugal forces. Even europhile Ireland, he said, was seething at the prospect of having to borrow more money to lend to the Greeks while reeling from even tougher austerity measures of their own.
But before the Anglo-Saxons get too smug, it’s worth dwelling on Volcker’s other big worry: the bankrupt state of the US housing market. Though it attracts far less attention these days, the American mortgage crisis which triggered the start of the credit crunch more than two years ago is still getting worse. This week, Fannie Mae and Freddie Mac, the oddly-named beasts that lent the vast majority of loans in the US reported a near-doubling of homeowners failing to pay their mortgages. Already deeply dependent on the US government for survival, Fannie asked Washington for another $10bn and questioned whether it could continue.
As Volcker pointed out, the US mortgage industry is by far the biggest component of by far the world’s biggest financial market – and if it cannot stand on its own two feet, what hope do the rest of have? And, regardless of who’s at the helm, Britain is in no better shape. In fact, a Tory promise to recognise all the additional financial commitments that Gordon Brown hid away from the national balance sheet could double the size of our official deficit. Britain can devalue its way out of trouble by letting sterling fall for now, but if the euro were to break up and all our main trading partners tried to devalue their new currencies too, we would simply be back to the economics (and possibly politics) of the 1930s.
The one hope is that all these countries can eventually grow themselves out of trouble, with rising incomes and taxes beginning to chip away at those colossal public and private debt mountains. But, as Bank of England Governor Meryvn King warned this week, the financial system’s latest bout of existential angst makes it all the harder for the real economy to recover. Instead, it increasingly looks like the last two years may simply have been a holding phase in the great western debt crisis.