Category Eurozone crisis

Dec 12 2011

European Perspectives


Well, since Friday, one could be excused for looking for a very high rooftop and having found one, either, hurl oneself to a soggy end because the UK was to be excluded from all the decision making at the EU and crumble away to the the new Albania or find a soapbox and trumpet the resounding nationalistic anthem of pulling away from Johnny Foreigner and his tricks and coming back home to take charge of our own destiny.  The reason for this was David Cameron chucking his veto at the Merkel inspired rescue plan for tighter fiscal oversight and regulation for Euro zone countries.  Her objective was clear and understood, her method was overly urgent and hence prone to longer term errors.  The French dwarf positively revelled in his put down of the “perfidious” British – a pay back that stretches from Crecy to Normandy and beyond.  It merely illustrated the paucity of intellect and leadership at theElyséePalace, although Cameron’s own response to the snub was hardly a worthy successor to Pitt, in fact as a PR man in what was essentially a PR battle he lost – badly!

The reason why he lost is that it became such a big thing in the UK.  In reality when Merkel announced that this was one of the most important summits of all time for the EU,  the British media misinterpreted her.  In fact, she meant it was vital for Germany and France and the Euro zone countries.  Vital for Britain it was not.  In fact despite Cameron’s assurances, at the dispatch box, this afternoon that he had acted solely in the Country’s best interest, it really didn’t matter one way or the other.  He was never going to get the assurances he said he needed because in the real world he didn’t actually need them.  The City is the largest financial clearing house in the world despite New York’s protestations.  It is the access point to the single biggest market in the world.  Europe is our biggest trading partner and we are the second or third largest economy in the EU ( depending on how you measure it).  Over 70% of inward investment comes in through the City.  And where would BMW, Mercedes Benz, and Siemens etc be without the lucrative deregulated UK market?  After years as a single market, the issue is clear; all of the EU member states are dependant on the others. So the perception of having Britain “bobbing about in mid Atlantic not having influence in the American or European sphere” is for the birds, or the tabloid press.  By simple virtue of its expertise and unique position in the financial markets,London will remain pre-eminent and most Europeans know it.

The great debate revolves around the sceptics in the Tory party and their commitment to pulling back powers from Europe.  Have we lost influence, will the Americans, Japanese, Chinese and Indian investors still love us?  How can we expect there not to be a two speed Europe now? – the dwarf from the Elysée has already trumpeted it from the rooftops in a characteristic display of Gallic arrogance,  it in his speech today.  In fact, the British veto is a sideshow.  The main issue, and the one which still has not satisfied the markets, is saving the Euro and with it the possibility of default on sovereign bonds by a number of big economies.  A simple equation, can the economies involved service the loans all governments take out to keep their countries going?  The degree of credibility on this by investors is measured on the level of yield the investor will demand to lend them money, the higher the yield the more risk of them losing their investment.  In other words, its about risk.

Germany’s yield is around 2% yield and the UK’s is not much worse compared with others paying 5, 6 or even 7% for their money.The greater the yield, the more the government has to pay back.  The more it pays back, the less it has to run its country and help its banks out should they fail. The Angel Angela wants to make sure there is fiscal discipline with automatic fines should targets not be met.  In exchange she will be looking at underwriting some of the guarantee funds the markets will demand to continue operating.  All this is to do with the BIG issue – the world economy and the fears of a second recession..  UK is not involved in the Euro zone and it is only of consequence if it collapses so Cameron will not stop anything except something which will impeded  trade links in the EU – restrictions on the City of London.  This is the crux of the other main point – UK is a member of the single market.  The city is involved in trading, in the single market.  Britain will not pull out of the single market, nor do the Europeans want us to.  Will we lose influence in the single market?  No, because its about business and trade not fiscal controls.

There are two separate but interdependent issues, the future of the Euro and the future of the single market. The second is not in doubt, the first is very much so.  As the rumours seep out of Germany tonight that the German Government is talking to the Commerzbank with a view of shoring it up, it was, and is, right for Angela Merkel to concentrate on that.  Cameron is incidental to this except that he is stuck between a rock and a hard place now with another major split between the coalition parties.  As for Angela, she is fuelled by history,Weimar and the subsequent rise of the right in Germany makes for her desire for a timid European Central Bank, exactly what Europe doesn’t need.  The French leprechaun has his own problems with the peculiar opaque relationship between the French Government and its banks.

It reminds me of Charles Upham who dies in 1994 – for those who don’t know him he was one of those rare breed of people who have won the VC twice.  A New Zealander with all his countries virtues he shunned publicity after the Second World War, farming close to Christchurch.  In a nation like New Zealand the cachet of having 2 VC’s was incredibly powerful but despite successive entreaties by politicians he only spoke out twice – in 1962 and 1971, both times against the European Common Market and he warned that the British way of life would be ruined by the Market because our politicians were dominated by money.  His verdict in 1971 was even more scathing – “They’ll cheat you yet, those Germans”

What price in the days to come the British Commonwealth once more being pushed as an alternative to the Single market  – god help us!

And a good bye and thank you to the great Jonny Wilkinson – the drop goal in the 2003 final ensures you will be immortal

Nov 3 2011

Do we ever learn?


The whirligig in Cannes is better than the final episode of Spooks.  What will happen next ? Does Greece need Harry Pearce and his gang to save them from perdition?  Papandreaou soldiers on carrying burning resentment against Mrs Merkel and Nicholarse.  There have been so many “seminal ” moments so far in the European Debt Crisis that I am giddy with trying to sort out what might happen next.

However, I am puzzled.  I was under the impression that the major cause of the banking crisis in 2008 was caused by greedy and amoral bankers lending to people in a sector of the economy that could not afford to pay back their borrowings and defaulted.  The fact that this lending was mainly in the housing sector is immaterial, the moot point was that, given a reasonable amount of scrutiny, most of the loans should not have been made.  The only way the banks could mitigate their risk was to bundle them up in a modern smoke and mirrors act and flog them on with the net result that the possibility of default was far higher than would have been individually acceptable.  This led to huge short term profit bubbles as Fanny Mae’s and Freddy Mac’s of the American sub prime market fuelled the financial crash.  The history of the world since then is well documented and given time I would suppose even Baldric at the Treasury has now grasped that it wasn’t really Labour who killed the world – rather the opposite.

But here’s the conundrum, the banks almost bankrupted themselves and because  Governments would  not see runs on banks and bank failures with all the attendant misery that would have caused ordinary folk, they bailed out the banks.  We had Lloyd’s and RBS and (almost ) Barclays needing huge Treasury input.   So at the end of that all the governments were broke or in reality having to service a bigger borrowing requirement than they would have had if the banks had not failed.  The banks were bailed out and were undergoing “difficult trading conditions”,   bad enough to start paying big bonuses again though.

Well the banks and the subsequent credit crunch tipped the world into a recession and we all know what happened next.  Consumer confidence went and therefore did demand for goods and services.  Companies responded by cutting costs and therefore margins.  The usual way to cut costs is to cut manpower – thus unemployment rises and this means the governmental benefit bill rises as well.  Company profits dropped and so did purchases so tax income is less.  This is the governments perfect storm and it is forced to borrow more.  This costs more because of the credit crunch and its ability to repay.

So here is my problem, any help these governments get, from the EU or the IMF, is subject to them repaying the loans. So if the whole she-bang was triggered by lending unrealistic amounts of money to individuals in the sub prime market, who they knew would never repay the debt and inevitably, default, how come we are now back into another sub prime market situation only this time in sovereign debts.  Greece is never going to be able to repay the debts, but last week Sarkozy and Merkel were looking more like a couple of bullying mortgage sellers than leaders of a monetary union.  They knew Greece would default or if they didn’t then we really are in trouble.  Then another deal for Italy which by 2020 will still owe 20% more than it earns.  Is there any resonance here.  Are we really proposing to lend people money which their taxpayers are putting into the IMF to bail out countries who have no chance to repay.  On top of this the conditions that the Lenders are demanding these countries fulfil are based simply on cost cutting.  Public sector jobs to go, pensions chopped, pay freezes et al – further unemployment and bigger government borrowing costs – sound familiar?  Yes its the Baldric Strategy as devised by the brains in the Treasury.

Are we really serious in repeating another sub prime mistake – this time at country level?  For what?  So Sarkozy can protect the French banks?  Or because Merkel shares the German reluctance of having anybody else’s control of the German Piggy Bank?   I am secretly sure that Angel Face would love to leave the Euro and revert to the Mark in response to the less pan – European stance of younger German voters.  Whichever way it goes – this will rumble along and postpone any recovery for years if we continue to throw money at the IMF to bail out sub prime countries.  Isn’t it strange that the Big Forehead and Baldric announced today that they are going to up Britain’s contribution to the IMF.  Wonder how he will justify this to the Tory grandees?