May 12, 2010
WE are living in truly historic times and witnessing historic events. Uncomfortably, the massive rally that followed the euro bailout appears to have petered out. The main leading indicator of sentiment is the euro/dollar exchange rate. Having rallied on Monday, the value of the euro has fallen back. One implication of this is that the financial markets are not convinced that the huge EU/IMF/ECB bailout will be enough. Maybe the markets think that the extraordinary web of borrowing between the European countries is just too big to manage, even with such guarantees in place.
People are asking the meaning of signing such a huge cheque. Are there strings attached? In order to make such guarantees valid, does there not have to be much closer integration in Europe (John Bruton had a thoughtful article on this yesterday)? But will this fly?
While the EU elite might want this, the people of Europe don’t. France, Holland and Ireland have all rejected more integration when asked (okay, we voted again). But the signal from the street is that the French want to remain French and sovereign, the Dutch do too and doubtless the Germans, Danes and Greeks feel the same way.
So the people are pulling one way, but the political and banking elite are pulling the other. As a result of this unstable system of IOUs that ties countries’ financial infrastructure together, we are seeing an obvious cleavage between the interests of the citizen and the interests of the power elite. This disconnect between the state and the citizen leads to the spectacle whereby a department of finance, which is supposed to make decisions in the average citizen’s interests, in fact makes decisions that validate existing banking contracts and that have nothing to do with the average citizen — but it is the citizenry who must foot the bill.
Because we are talking about Europe, history and commitments, let’s look back a bit. When examined from a historical angle, the whole financial structure of Europe is now eerily reminiscent of the system of alliances that existed before World War One. How did it happen that when a Serb nationalist in Bosnia murdered the heir to the Austrian throne, what should have been a local quarrel between the Kingdom of Serbia and the Austrian Empire, ended with young men from Castlebar and Dingle dying in Belgian trenches?
Similarly, how did it happen that when the Greek government failed to control its spending, a loan application last week in Waterford was withdrawn? What connects Crete to Cork?
Remember the alliances in 1914 were constructed to prevent war and avoid conflict. But in the end they delivered the opposite outcome.
Now think of credit around the eurozone. The loans from German banks to Irish banks were supposed to facilitate credit, but now the very existence of these huge interbank loans is making credit dry up.
Look at today’s financial alliances. The existence of the euro means that all euro countries are tied together — and not just politically. The underlying adhesive that binds these alliances together are the huge loans between eurozone banks. For example, our banks owe German banks alone â‚¬129bn — that’s close to the size of our GNP. When Greece wobbles, a fault line emerges and the German banks begin to worry if the Greeks will ever pay back the loans.
With this in doubt, the Irish loans also look in doubt simply because the bankers are getting nervous. Now with worries about existing loans no one else will lend further to Irish banks; they have to pull in their horns and a business loan application that was due to be scheduled in Waterford gets cancelled.
Unemployment goes up incrementally in Waterford but it also goes up all over the country, which undermines our economy a little bit further and off we go again on the next leg down.
So the contagion that we hear so much about links everyone to everything all of the time. It is the financial equivalent of Germany coming into the war to defend Austria, while Russia comes in to support the Serbs. But the Russian involvement then committed Germany against Russia based on a treaty between Germany and Austria, and then in turn France and Britain came in to support Russia.
Suddenly, instead of a Greek and peripheral European crisis, we get a continent-wide panic which prompts a dramatic response. When World War One broke out, everyone was giddy with patriotism but most truly expected a few skirmishes and then reason would prevail with the whole thing over by Christmas. That didn’t prove to be the case. The war created its own dynamic and all the reasonable logic of the summer 1914 was gone by December.
Now think of the huge bailout. Initially, markets were euphoric. But now, only 24 hours later, people are not so sure. If the markets shrugged off a â‚¬120bn bailout for Greece last week, I suppose it’s not too surprising that they shrugged off a â‚¬750bn bailout for the whole of Europe this week.
But the “ever increasing bailout” dilemma leaves us in a huge bind because if this bailout is not perceived to be enough, what’s next? Each bailout has to be immeasurably bigger than the last one and all this undermines the credibility of the bailouts because so many countries have run out of money, which is the nub of the problem in the first place.
Most of us see through this bluff. It was summed up succinctly by that great economic thinker Jason Byrne on the Late Late the other night when he laughed and the audience laughed too at the ludicrous notion of a country that is bust, like us, pledging money we don’t have to come to the aid of another country that is bust, Greece.
When a smart comedian sees through the bluff and is throwing out the gag for a laugh and when the people in the audience of the Late Late nod in agreement, no amount of financial spin can obscure the obvious.
AS in World War One, the initial euphoria wanes and the population realised that they were in for a long difficult slog. Do we have the appetite for similar austerity to save a system of bank alliances? I’m not too sure the average Greek, Spaniard or indeed Irishman has the stomach for what lies ahead.
The obvious alternative to borrowing to solve a problem that was caused by too much borrowing in the first place is to orchestrate an organised default, realise that we can’t compete with Germany in the single currency, create a two-speed Europe and start again.
But something so obvious could never fly, could it?