October 17, 2011
The economies of the eurozone desperately need to start growing again, but the very currency that binds them is also acting as a straitjacket to growth
Do you want to know what bank recapitalisation looks like? I am sitting opposite it right now. It looks like two well-heeled French bank executives, in matching rimless Armani glasses, scanning spreadsheets nervously in the foyer of the swanky Bonnington Hotel in Dubai.
They are here looking for money. They have been sent here from Paris to get cash from the Arabs. This is the human face of the mad grab for cash that is going on all over the Gulf as Europe’s bankers turn to one of the few places in the world with enough money to bail them out. Obviously, the French will hope to have bagged the swag by midweek so that their clubbable chairman can clear his throat and announce solemnly on RTL that the bank is ‘‘well capitalised’’.
This is what Europe has come to – down here in the Gulf with the begging bowl looking for capital and prepared to give almost anything away to get it. This is the endgame, and Arab money alone won’t solve it.
A few years ago, this column wrote that the euro would split up because of the inconsistencies of having a currency union in an economy that was not suited to it. The inconsistencies are not limited to the fact that there is no political or fiscal union, but extend to the deep demographic, cultural and industrial divergences that are so wide that no amount of integrationist cheerleading from Europe’s elite can possibly mask them. Of course, questioning the euro back then was tantamount to treason – a bit like questioning the property jamboree a few years earlier.
Anyone in the Gulf with a long enough memory will remember that this has happened before, and the solution to the crisis then, as now, will be massive write-off of debt all across Europe. Without debt write-off, we will get political and social implosion.
Make no mistake about it – Europe is the Argentina of the global economy. By this, I mean what is happening in Europe now is exactly what happened to the emerging markets in the 1970s and 1980s. The common denominator in each episode is oil and the Gulf. If you want to know how the world works at a certain level, all you have to do is follow the money.
In the 1970s, the first oil shock led to a massive transfer of wealth from the West to the Arabs. The Arab economies (out-side of the oil industry) were too weak to absorb all this cash, so they deposited it in the international banks. The international banks needed to lend this to someone, but the Europeans and the Americans were in a recession caused by the very spike in oil prices which led to the Arab windfall. So the banks needed to find other borrowers.
They found what were called then the ‘‘less developed nations’’. These were the commodity-rich countries like Argentina, Brazil, Mexico and the likes of Zaire. These countries proceeded to blow the cash on all sorts of stuff, such as the 1978 World Cup and the epic Rumble in the Jungle, for example. Anyway, whatever it was spent on, when the creditors looked for their money back, there wasn’t any. Citibank – the biggest lender – was bailed out by the US government, and the eventual solution involved massive debt write-offs. These write-offs were made legitimate by the US government’s Brady Bonds scheme, which swapped old debt for new debt and the old creditors took a massive loss today in the hope of being paid something tomorrow.
Crisis over. I spent some time working in this Brady Bond market for the very same French bank that tonight is being represented by my two neighbours wearing Prada and sitting across the opulent foyer. What interested me was the fact that the banks that had been burned by the likes of Brazil and Argentina didn’t walk off in a huff after they had been told that they would not be paid back. On the contrary, they were fulsome in their participation in the new debt market. If you want evidence that the market has no memory, it should be this.
The Arabs were paid in full by Citibank – with the help of the American taxpayer. Today, oil is again a factor in Europe’s debt crisis. Again we see the massive increase in the price of oil from 2000-2008 filling the Arab world with money. This time, much of it was spent at home. As I look out my hotel window at this gleaming new city, it is easy to see where it went. But like the last time, this new cash also injected liquidity into the global economy, and Arab money went looking for a home.
One of the homes was, of course, Europe, and particularly the eurozone. As the Arab money linked up with cash from German savers, it created a wall of credit, which was lent out to fuel the Irish property boom, the Greek budget deficit, the Spanish condo craze and governments all over the eurozone. In fact, almost anyone who wanted cash could get credit. The banks thought they were invincible. Then – at its most simple – someone asked for the money back and, lo and behold, there was none. Initially, Germans asked for money back that they had lent to Ireland, and discovered that they owned a ghost estate. Now that experience has been repeated and the lenders – both European and foreigners – realise that they are not getting their cash back. It’s all spent. It’s all gone. So now the share prices of banks have collapsed as investors understand they are not getting their cash back.
Equally, even if Europe does come up with a Brady-style plan, the missing ingredient is growth. Without economic growth, no debt deal will work because only growth in the future will pay off the debt. It is beginning to dawn on everyone that the euro is a straitjacket. It makes weak economies like Greece too expensive so they can’t export enough, and it makes strong economies like Germany too cheap so they export too much.
The currency reinforces the initial inconsistencies. The only way out is either a United States of Europe, where Germany pays the bill and calls the tune, or the reversion to national currencies.
The banking crisis is only the start of this long process. In a sense, the French bankers here in the Gulf are only fooling themselves if they think that a few hundred billion dollars of Arab money is going to solve the problem.
This is a problem at the heart of Europe, and its outcome will define the European Union for a generation. Without growth there is no EU and with the euro there won’t be enough growth. The currency that was supposed to gel Europeans together is driving us apart. When will the penny drop?