THERE is a crucial yet often over-looked difference between the mounting fears over the solvency of Greece, Portugal and Spain and worries about Britain’s debt mountain. All four countries are borrowing far too much – yet Britain still controls its own currency, sterling, in which our government’s debt is denominated.
We could theoretically print our way out of trouble in extremis to pay off our gilts (although this would trigger hyper-inflation). Greece, Portugal and Spain don’t have that option and could therefore actually default on their debt, which is denominated in euros, a currency controlled by the independent European Central Bank. The weaker eurozone countries are in the same position as emerging economies whose debt is denominated in greenbacks.
That is the one reason why investors were relatively unfazed by the ending of quantitative easing yesterday, even though this means the Bank of England will no longer fund UK government borrowing. Don’t get me wrong: Britain is in deep trouble and will find it hard to sell its gilts at current yields – but for the time being our problems pale in comparison with the eurozone’s, where a full-blown sovereign debt crisis is much likelier.
The weaker eurozone economies have also relied even more heavily than Britain on help from their central bank. Ever since the crisis broke out in earnest, the ECB has been accepting BBB-rated bonds as collateral when providing banks with funds through its money market operations – traditionally, it only accepted safer A- or better. For the time being, the debt of the weaker Euro nations is still sufficiently highly rated to be eligible for the higher threshold, which will once again become compulsory from the end of the year. But if they are downgraded, Greek and Portuguese bonds would no longer be acceptable collateral, trashing local banking systems.
Portugal and Spain’s only hope is to slash their deficit themselves – the route that Greece is supposedly following – or beg for a bail-out from the other EU nations. The latter, of course, would be deeply problematic: when the euro was launched, a sceptical German public was conned into relinquishing its beloved Deutsche Mark with the promise that it would never have to foot the bill for the profligacy and stupidity of poorer member states. Greece would have to become a fully-fledged protectorate of the EU. It would also confirm that the eurozone as currently constituted don’t work: it should either become a single government with fiscal as well as monetary powers (with disastrous consequences for democracy and institutional competition) or give up and expel all the weaker member states.
It would be near-impossible for Greece to pull out of the euro without also defaulting on its debt: a new Drachma would have no credibility and would sink like a stone, increasing further the value of Greece’s euro-denominated national debt. The ensuing crisis in Greece – strikes, hyper-inflation, bank collapses and chaos – would make Dubai’s sovereign wobble look like a picnic; institutions worldwide would be hit by losses. And if one member state were to quit the euro, others would soon follow.
Ed Balls, Gordon Brown’s right hand man, was the architect of Britain’s macroeconomic policy. As such he stands guilty of many disastrous decisions. But he got one thing right – we remained out of the euro. It was the best decision Brown ever took.