Nicolas Sarkozy, the French president, looks spent. But policymakers have to galvanise themselves for one last effort. Photograph: David Gadd/Allstar
We have been here before. As battle-hardened veterans of the panic of 2008 were quick to point out, early November 2011 has started to look frighteningly like mid-September 2008. It is not just that a policy error – George Papandreou's decision to pursue a referendum – has triggered financial market mayhem, although it has. Nor is it just that there has been a deluge of bad news. It is the inescapable sense that policymakers have lost control of the situation and now fear for the worst.
That's how it was three years ago when the US Treasury allowed Lehman Brothers to go bust. And that's how it has been this week following the announcement by Papandreou that he wanted to hold a referendum – hastily abandoned on Thursday – on the bailout package agreed for Greece.
At the annual meeting of the International Monetary Fund six weeks ago, Britain's chancellor, George Osborne, set a six-week deadline for the eurozone to resolve its sovereign debt crisis. Those six weeks expire with the current two-day gathering of the G20 group of developed and developing nations in Cannes, and it is an understatement to say that the deadline has not been met.
Greece is in turmoil, with Papandreou on his way out and elections likely. Silvio Berlusconi's days are also numbered, with his departure likely to take place against the worrying backdrop of an intensifying financial crisis in Italy. Bond yields on Italian debt climbed sharply on Thursday to their highest levels since the creation of the single currency.
Just as the contagion from Lehmans quickly spread to other banks seen as weak – HBOS and RBS, in Britain's case – so the infection has spread from Greece to other vulnerable eurozone members.
Nor does the parallel end there. Within a week of Lehmans going down, even banks that had appeared healthy were at risk. The current increase in French bond yields is a deeply troubling development.
How will this end? Well, nobody in Cannes needed to be reminded that the six months after the Lehman bankruptcy saw the biggest collapse in global economic activity since the 1930s, with a seizing-up of banking, industrial production and trade. In Britain's case, national output fell by 7% and in the subsequent three years only half the lost ground has been regained.
The fear is this: back in 2008, policymakers were well armed, united and fresh. Today they are none of those things. Interest rates have been cut to the bone, the money taps turned full on, the public finances trashed. Ammunition of the traditional kind is running out, leaving central bankers and finance ministries dependent on untried ways of boosting activity. That will be made more difficult because of lack of agreement in any relevant forum – the G8, the G20, the European Union or the Euro Group – about what should be done. There has been a spectacular lack of leadership.
Finally, it is clear that politcians, especially those in Europe, are exhausted. Take a look at Nicolas Sarkozy. He looks spent.
Policymakers have to galvanise themselves for one last effort because, if they don't, the risk is that the recession about to engulf them will be as bad as, if not worse than, that seen in 2008-09.
Problem number one is that monetary union is a flawed concept and always has been. A one-size-fits-all interest rate didn't work and intensified the boom-bust cycles of the weaker eurozone states.
Problem number two is that the debt crisis is far from over, and its continuation has compounded the pressure on the peripheral eurozone countries. The banking system remains dysfunctional and credit is both scarce and expensive.
Britain and the United States have at least been able to relieve some of the pressure on their economies through a depreciating currency. Greece, Italy and Spain have not enjoyed that luxury.
Problem number three is that there has been a series of blunders in the handling of Greece, which throughout has been a question of too much and too little: too much austerity and too little recognition that the problems of one small country could be as systemically important as one relatively small American investment bank. Sarkozy and Angela Merkel must now be ruing all those missed opportunities when they could have accepted the need for a clean Greek default rather than settling for muddling through.
Almost certainly, it is now too late to avoid the eurozone sliding back into recession this winter, dragging the UK with it. Even now, though, it would be possible to prevent a full-blown slump.
First, the European Central Bank needs to start buying Italian bonds aggressively and regularly. The odd €5bn of purchases will not be sufficient: the ECB needs to be thinking in terms of €500bn or €1tn. Given the magnitude of the crisis, Germany will, inevitably, object strongly, but Merkel has a stark choice. Germany can either sanction massive intervention by the ECB or it can accept that the single currency will shrink to perhaps a handful of countries, in which case the euro will go through the roof and kill Germany's export-led economy.
Second, the G20 needs successfully to complete the negotiations in Cannes to increase the firepower of the International Monetary Fund.
The IMF is going to need cash, and plenty of it, if it is to help bail out Europe and be a more effective lender of last resort.
Third, there has to be a recognition that the fetish for austerity in some countries is proving self-defeating. Those who warned that the global economy was not fit to withstand savage budget cuts so soon after coming off the life support machine have been proved right.
The current low bond yields in Britain, Germany and the US are a sign not of strength but of distress, but they do afford the opportunity to borrow for long-term, productive capital programmes at very attractive rates.
That opportunity should be seized, because policymakers need to re-engage with electorates unhappy about the lack of jobs, the squeeze on living standards, the widening gulf between the haves and have-nots, and the overriding feeling that big finance has got away with it.
The mood is ugly, and unless policy-makers act with a sure-footedness and sensitivity not seen up to now, it is about to get uglier.
Publicada 3 Noviembre 2011
http://www.guardian.co.uk/business/2011/nov/03/eurozone-crisis-policymakers-lose-control
That's how it was three years ago when the US Treasury allowed Lehman Brothers to go bust. And that's how it has been this week following the announcement by Papandreou that he wanted to hold a referendum – hastily abandoned on Thursday – on the bailout package agreed for Greece.
At the annual meeting of the International Monetary Fund six weeks ago, Britain's chancellor, George Osborne, set a six-week deadline for the eurozone to resolve its sovereign debt crisis. Those six weeks expire with the current two-day gathering of the G20 group of developed and developing nations in Cannes, and it is an understatement to say that the deadline has not been met.
Greece is in turmoil, with Papandreou on his way out and elections likely. Silvio Berlusconi's days are also numbered, with his departure likely to take place against the worrying backdrop of an intensifying financial crisis in Italy. Bond yields on Italian debt climbed sharply on Thursday to their highest levels since the creation of the single currency.
Just as the contagion from Lehmans quickly spread to other banks seen as weak – HBOS and RBS, in Britain's case – so the infection has spread from Greece to other vulnerable eurozone members.
Nor does the parallel end there. Within a week of Lehmans going down, even banks that had appeared healthy were at risk. The current increase in French bond yields is a deeply troubling development.
How will this end? Well, nobody in Cannes needed to be reminded that the six months after the Lehman bankruptcy saw the biggest collapse in global economic activity since the 1930s, with a seizing-up of banking, industrial production and trade. In Britain's case, national output fell by 7% and in the subsequent three years only half the lost ground has been regained.
The fear is this: back in 2008, policymakers were well armed, united and fresh. Today they are none of those things. Interest rates have been cut to the bone, the money taps turned full on, the public finances trashed. Ammunition of the traditional kind is running out, leaving central bankers and finance ministries dependent on untried ways of boosting activity. That will be made more difficult because of lack of agreement in any relevant forum – the G8, the G20, the European Union or the Euro Group – about what should be done. There has been a spectacular lack of leadership.
Finally, it is clear that politcians, especially those in Europe, are exhausted. Take a look at Nicolas Sarkozy. He looks spent.
Policymakers have to galvanise themselves for one last effort because, if they don't, the risk is that the recession about to engulf them will be as bad as, if not worse than, that seen in 2008-09.
Problem number one is that monetary union is a flawed concept and always has been. A one-size-fits-all interest rate didn't work and intensified the boom-bust cycles of the weaker eurozone states.
Problem number two is that the debt crisis is far from over, and its continuation has compounded the pressure on the peripheral eurozone countries. The banking system remains dysfunctional and credit is both scarce and expensive.
Britain and the United States have at least been able to relieve some of the pressure on their economies through a depreciating currency. Greece, Italy and Spain have not enjoyed that luxury.
Problem number three is that there has been a series of blunders in the handling of Greece, which throughout has been a question of too much and too little: too much austerity and too little recognition that the problems of one small country could be as systemically important as one relatively small American investment bank. Sarkozy and Angela Merkel must now be ruing all those missed opportunities when they could have accepted the need for a clean Greek default rather than settling for muddling through.
Almost certainly, it is now too late to avoid the eurozone sliding back into recession this winter, dragging the UK with it. Even now, though, it would be possible to prevent a full-blown slump.
First, the European Central Bank needs to start buying Italian bonds aggressively and regularly. The odd €5bn of purchases will not be sufficient: the ECB needs to be thinking in terms of €500bn or €1tn. Given the magnitude of the crisis, Germany will, inevitably, object strongly, but Merkel has a stark choice. Germany can either sanction massive intervention by the ECB or it can accept that the single currency will shrink to perhaps a handful of countries, in which case the euro will go through the roof and kill Germany's export-led economy.
Second, the G20 needs successfully to complete the negotiations in Cannes to increase the firepower of the International Monetary Fund.
The IMF is going to need cash, and plenty of it, if it is to help bail out Europe and be a more effective lender of last resort.
Third, there has to be a recognition that the fetish for austerity in some countries is proving self-defeating. Those who warned that the global economy was not fit to withstand savage budget cuts so soon after coming off the life support machine have been proved right.
The current low bond yields in Britain, Germany and the US are a sign not of strength but of distress, but they do afford the opportunity to borrow for long-term, productive capital programmes at very attractive rates.
That opportunity should be seized, because policymakers need to re-engage with electorates unhappy about the lack of jobs, the squeeze on living standards, the widening gulf between the haves and have-nots, and the overriding feeling that big finance has got away with it.
The mood is ugly, and unless policy-makers act with a sure-footedness and sensitivity not seen up to now, it is about to get uglier.
Publicada 3 Noviembre 2011
http://www.guardian.co.uk/business/2011/nov/03/eurozone-crisis-policymakers-lose-control
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