Another week, another crisis in the eurozone. Another last minute deal and another hundred billion or so tossed at the bankrupt Greek government. It’s an odd way to run a whelk stall, and makes you wonder how long it can go on. The consensus among the British press and politicians this week is that it can’t and that the euro is a busted flush. Ha ha – told you so.
Mind you, British opinion formers have confidently predicted the demise of the euro repeatedly over the last few years and the single currency somehow survives. And if you go abroad this summer you’ll find that the euro is not only still around, it’s worth a great deal more than the pound. It remains one of the world’s reserve currencies, which suggests that someone somewhere still has confidence in it.
So, has anything changed after this latest bail out – the second “final solution” in six months? And should we bother about it anyway, since Britain declined the euro?. Well, I think something pretty fundamental has changed through this sovereign debt crisis, if only because the countries of Europe have looked into the abyss and decided that there is no alternative but to keep the euro almost at any cost. We can’t go on basing policy on the complacent expectation that the euro will somehow go away. It won’t.
On Thursday, President Sarkozy and Chancellor Merkel agreed once again to save Greece from default by another massive loan. In the financial world this is called “kicking the can further down the street” – i.e. putting off the inevitable Greek default. Though it’s a pretty long street and a pretty big can. Greece will now be able to borrow at 3.5% over 30 years, instead of at 16% for 30 months as it does now. Greek bonds now have the backing of France and Germany – two of the greatest industrial powers on the planet.
Greece’s problem was that no one would lend it money at anything like a reasonable rate of interest. It’s like having a mortgage where they keep putting the interest rate up until the mortgage payments are higher than your annual salary. For individuals the solution is personal insolvency; for countries it means that they have to say ‘sorry guys, but we aren’t going to pay you’. The financial world doesn’t like that, which is why the European Central Bankers have been trying to get Greece off the hook by giving it ever-greater credit lines.
Why don’t they just go ahead and let Greece default, like an ordinary person in debt? Well, because technically no one is allowed to default in the euro, and the consequences would be catastrophic if any member state did. If the money lenders start to believe that one member country’s debt promises will not be met, then they’ll start to charge more to lend to all the rest of the eurozone countries. Italy and Portugal already look vulnerable, with the bankers demanding an 11% return on Italian bonds.
Why don’t the EU governments not just get together and tell the money lenders: no, you can’t do that? You must lend to Greece/Italy/Ireland/ Portugal etc.? Well, just try. Governments can make war, build schools and raise taxes, but the one thing they cannot do is force people to lend to them. It’s not that international financiers are heartless bastards though many of them are – it is just the logic of the market. Anyway, most of the Greek debt is held by German, French and – whisper it – British banks. If they were forced to lend money with no prospect of it being returned, then they would go bust, – just like in 2008.
Neither France nor Germany will allow the euro to break up because it would precipitate an epic banking crisis and a global slump. Even the chancellor, George Osborne, accepts this, which is why he called last week for the EU to move to a ‘fiscal union’, whereby the EU effectively becomes one economic entity, like the USA. In America, the wealthy states accept responsibility for weaker ones through the federal government. When California got into financial difficulty a couple of years ago no one talked about the collapse of the dollar or the disintegration of the United States. This is now the route that the EU must take, is already taking.
Under last week’s deal, the EU’s European Financial Stability Facility will be able to intervene much more directly in the economies of member states like Italy and Portugal even before they get into financial crisis. Member states will have to accept pretty draconian intervention too, to prevent countries running up debts of 140% of national income as in the case of Greece. The stability fund will also be able to buy bonds, rescue banks and, ultimately, issue bonds of its own – though Chancellor Merkell hasn’t actually given the ok yet. In future EU debt will be in the form of European bonds backed by France and Germany, not worthless notes issued by basket cases like Greece. One union to bind them all; one currency to call their own.
Where does this leave Scotland? Well, the SNP is going to have to ask itself serious questions about when and how to join this new economic state. It will involve a considerable loss of sovereignty for a start. That might be a good thing of course, and sticking long term to a collapsing pound sterling may not be such a great alternative. Devaluation is not a route to economic recovery, though many in the British government appear to believe that it is. Britain may end up rather like Argentina, which has its own currency, but has to try to keep it pegged to the dollar to please the money markets. And if we end up with a sovereign debt crisis, it really will mean default (as it did for Argentina in 2002) because the EU will not be there to bail us out.
I don’t think commentators in the UK, revelling in Schadenfreude, fully understand this. There is no way back. Europe is now condemned to become a federal country, even though many of its citizens don’t want it, because the alternative is too awful to contemplate. It leaves something of a democratic deficit, because the EU is not really a democracy and the European parliament has very limited powers. But it is coming yet for all that.