Just when it seemed safe to go out again, the monster that is Eurozone debt has returned to threaten us all.
In truth, it never really went away. For most of this year, the beast has been gorging on billions of euros provided very cheaply by the European Central Bank, but this was never going to be enough to satisfy it. And now, there are fresh stirrings, underpinned by growing political uncertainty, in France, Greece and the Netherlands in particular.
The problem is essentially one of politics rather than of economics, markets or banking. When the euro was conceived and launched in the 1990s, the policymakers failed to establish a system of automatic fiscal transfers from the prosperous to less prosperous regions such as we have in the UK, or to impose proper fiscal disciplines across the whole area. This was not an oversight. Fiscal integration was not proposed because the costs in terms of democratic accountability and loss of sovereignty would have been far too high for many countries to accept.
As a result, the parlous fiscal position in some (largely southern European) countries now threatens to undermine monetary union across all 17 members and economic stability in Europe and beyond.
This is not a sudden crisis. Since 1999, the weaker economies have failed to ‘converge’, or to reform, and, unable to devalue their currencies, remain hopelessly uncompetitive with the likes of Germany. But, as members of the Eurozone, they have been able to borrow very cheaply and as the debt built up (in Greece’s case to 160% of GDP) they lacked the means to meet the interest payments. A market-led default by Greece was avoided only by some fancy (or dubious?) footwork by the authorities last December, but this merely bought time. As Europe slides into recession, and more countries are pushing austerity programmes to get their public sector finances in order, fears about the ability of major economies such as Italy and Spain to meet their debt obligations are building. And as the electorates in several countries lose patience with their governments, politicians are becoming more nationalist and less European in their outlooks.
Although the UK is not part of the Eurozone, feelings of schadenfreude are misplaced, and the collateral damage from the crisis is one of the biggest threats to recovery in this country. Much of the government’s hopes of an upturn here rest on exporting our way to growth since domestic demand is constrained by indebtedness amongst consumers and in the public sector. But with over 50% of our exports going to recession-bound Europe, this will be harder to achieve. Any default or debt restructuring in Europe will, moreover, affect the banking system in all sorts of ways and threaten the future supply of credit while a rescue of Italy or Spain will be too big for Europe to manage. Responsibility would fall on the IMF, and as members, the UK would have to make its contribution.
All in all, Europe is a mess and a risk, with a long-term solution no nearer than it was last autumn. In the 1930s, The Times ran a story headlined ‘Fog In the Channel, Europe Isolated’. If only it was that simple.