WHAT a tale of incompetence, mad chutzpah, bullying and stupidity. The tragi-comedy that is the Eurozone’s crisis, and especially the farcical going-ons in Greece, ought at some point to be turned into a Hollywood movie. All the ingredients are present for a blockbuster, from cartoonish figures such as Nicolas Sarkozy or Silvio Berlusconi to the full gamut of emotions: greed, fear, envy, anger, jealously and spite. The only problem is that the plot has become so complex – with new developments every few minutes throughout the day yesterday – that even a master movie-maker would struggle to contain the film to a couple of hours.
Yesterday’s U-turn on Greece’s referendum was a spectacular reminder that games of brinkmanship often trigger uncontrollable events – and that democracy has become a sham in bankrupt, handout-dependent Greece. For the first time since the euro’s launch, the possibility that a country may quit the single currency is being openly discussed. Regardless of what happens to the Greek government over the next few days, and whether the old myth that it will deliver on austerity can be re-established, the official, quasi-religious Brussels line that it is inconceivable that any state could ever quit the single currency has been shattered.
We also learnt more about the views of Mario Draghi, the new boss of the European Central Bank and hence one of the key characters in this saga. He cut rates by a quarter point, which cheered some in the markets. Ultimately, however, the pea-shooter approach of tweaking base rates will be utterly irrelevant. The important statement yesterday was that he agrees with his predecessor that his job isn’t to bail out countries and to act as the lender of last resort to governments. This means that – even though the ECB now owns six per cent, by some estimates, of the total value of Italian and Spanish bonds – he will continue to refuse to monetise debt, handing that job over to the ailing bailout fund and to the IMF.
Another looming bombshell is the possibility that Italian government bond yields keep on rising. The seven per cent mark would be a symbolic disaster – but what really matters is the spread between German and Italian yields. If it hits and remains at 4.5 per cent for enough consecutive days, the clearing houses will increase the charges for trading Italian bonds, probably by 15 per cent. Higher margin requirements will be a major blow, fuel increased panic and lead to further spikes in bond yields. This vicious circle happened last year with Ireland at the height of its own problems; clearing houses need to act in a prudent way to protect themselves. It would be far worse if they didn’t – the last thing we need is for clearinghouses to fall victim to the crisis, so let us hope desperate governments don’t try to pressurise them.
Back in Britain, the Eurozone crisis will be devastating for the coalition in several different but related ways. In the short-term, there is bound to be another backlash from Tory backbenchers about likely proposals to increase the International Monetary Fund’s war chest. This would increase the UK’s exposure and ensure that the British taxpayer would eventually have to pay for rescuing the Eurozone, something which would not be acceptable to many Tory MPs. If Labour also decided to vote against the increase, on the basis that it should be the ECB rather than the IMF that ought to be acting, the government could be defeated
In the longer term, the big issue will be how badly the crisis affects the UK’s economy. If the official figures are to be believed, GDP grew by 0.5 per cent in the third quarter. But yesterday’s purchasing managers index for services suggests that growth has probably ground to a halt in the fourth quarter. Domestic factors are one reason – but the chaos in the Eurozone has hit UK exports and encouraged companies to put spending plans on ice. For the coalition, the pressure from several quarters of weak GDP would soon become unbearable. Panic would set in and backbenchers – lefty Lib Dems as well as rebel Tories – will start to demand some sort of action.
But the real problem will come when the EU, in a desperate bid to salvage the euro, decides to adopt a new, far more integrationist Treaty, either just for the Eurozone or for the whole of the EU. Tory Eurosceptics will rightly want Cameron to use this as an opportunity to repatriate powers from Brussels to London – something the Lib Dems won’t countenance. The EU will also hate the idea. David Cameron looks safe in his job at the moment – but he had better beware the fallout from Europe’s folly.
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