The euro: On the brink of crisis
The governments of the eurozone stand on the brink of their own Lehman moment. The meltdown in Greece has much in common with the storm that eventually toppled the Wall Street bank in autumn 2008. Like Lehman Brothers, the Greek crisis would not normally bother its neighbours – let alone send shockwaves around the world. After all, Greece is a speck in the world economy (contributing 0.5% of global GDP last year, according to figures from Capital Economics); and it is a lightweight in the 16-country eurozone (making up only 3% of the club's GDP). Yet just as Lehman's collapse triggered a final, giant crisis for the entire banking system, so Athens could be the first domino in a chain that brings down Lisbon and even Rome and Madrid. Melodramatic? Just ask Portugal's prime minister, José Sócrates, who yesterday spoke of "a speculative attack on the euro and Portuguese debt" – at the same time as announcing that he would bring forward spending cuts and tax rises pencilled in for 2011. Or speak to Spain's government, which yesterday saw its credit rating downgraded. If a lid is not put on this crisis soon it could boil over into a continent-wide catastrophe.
Trouble is, containing this situation requires big and decisive action by Angela Merkel, Nicolas Sarkozy and the other leaders of the single-currency club – leadership of a kind that has been sorely missing ever since a little local difficulty was first sighted in Athens months ago. Again, there are parallels with the drama at Lehman, which was greeted by Washington with a concerted bout of hemming and hawing – until it got too late. Larry Summers, who was number two at the US treasury during the great Asian crisis of the late 90s and so knows a thing or too about economic firefighting, coined a golden rule for dealing with meltdowns. When markets overreact, he said, policy must overreact too. In other words: when in a really deep hole, governments have to use every tool at their disposal to get out. To which one might suggest Merkel's Rule: when another member of your gang is in a mess, keep on talking about what you are going to do and meanwhile do absolutely the opposite. She was at it again yesterday, talking about how Greece was going to get its European cavalry any moment now, while at the same time making it clear that Athens should never have been a member of the eurozone in the first place.
On that last point, Germany is right. Indeed, it is arguable that Greece, Portugal and Italy all have such different economies from their counterparts in the old deutschmark bloc that they should never have been allowed aboard the single-currency boat. But, unless they are about to leave, now is not the time to say that. Now is the time to defend them by backing their sovereign debt with billions of euros, on the grounds that an attack on one member of the gang is an attack on all. That is certainly the way financial markets are seeing it, with senior figures at major banks now talking about how bond investors are "sniffing blood". After the fall of Greece comes Portugal, then Italy – and then?
This week may mark the eurozone's tipping point: the point when governments lost control and financial markets began calling the shots. That also has parallels with the banking crisis. And the two episodes should be seen as part of a historical continuum, in which banks weighed down by an excess of debt are bailed out by governments who take on that debt – and then have to get bond markets to keep funding them. That is the position in Britain too, which is why the crisis in Europe will form a crucial part of the backdrop for tonight's party leaders' debate on the economy. Gordon Brown, David Cameron and Nick Clegg have struggled to articulate an agenda that is about more than merely doing what financial markets demand. If they want a reason to come up with one, they could do worse than look across the Channel.
Trouble is, containing this situation requires big and decisive action by Angela Merkel, Nicolas Sarkozy and the other leaders of the single-currency club – leadership of a kind that has been sorely missing ever since a little local difficulty was first sighted in Athens months ago. Again, there are parallels with the drama at Lehman, which was greeted by Washington with a concerted bout of hemming and hawing – until it got too late. Larry Summers, who was number two at the US treasury during the great Asian crisis of the late 90s and so knows a thing or too about economic firefighting, coined a golden rule for dealing with meltdowns. When markets overreact, he said, policy must overreact too. In other words: when in a really deep hole, governments have to use every tool at their disposal to get out. To which one might suggest Merkel's Rule: when another member of your gang is in a mess, keep on talking about what you are going to do and meanwhile do absolutely the opposite. She was at it again yesterday, talking about how Greece was going to get its European cavalry any moment now, while at the same time making it clear that Athens should never have been a member of the eurozone in the first place.
On that last point, Germany is right. Indeed, it is arguable that Greece, Portugal and Italy all have such different economies from their counterparts in the old deutschmark bloc that they should never have been allowed aboard the single-currency boat. But, unless they are about to leave, now is not the time to say that. Now is the time to defend them by backing their sovereign debt with billions of euros, on the grounds that an attack on one member of the gang is an attack on all. That is certainly the way financial markets are seeing it, with senior figures at major banks now talking about how bond investors are "sniffing blood". After the fall of Greece comes Portugal, then Italy – and then?
This week may mark the eurozone's tipping point: the point when governments lost control and financial markets began calling the shots. That also has parallels with the banking crisis. And the two episodes should be seen as part of a historical continuum, in which banks weighed down by an excess of debt are bailed out by governments who take on that debt – and then have to get bond markets to keep funding them. That is the position in Britain too, which is why the crisis in Europe will form a crucial part of the backdrop for tonight's party leaders' debate on the economy. Gordon Brown, David Cameron and Nick Clegg have struggled to articulate an agenda that is about more than merely doing what financial markets demand. If they want a reason to come up with one, they could do worse than look across the Channel.
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