Wen Jibao’s comments to the BBC about the euro crisis dramatise the shift in economic power from west to east. Jibao remarked that: “Trust is more important than currency and gold and now, during the debt crisis, we again bring trust to Europe. I have total trust in Europe's economic development”. But China’s role in the euro crisis is far less problematic than Russia’s.
As the world braces itself for the inevitable Greek default, and investors look nervously at potentially exposed banks, perhaps it's worth recalling Argentina's implosion a decade ago. Here is what the Spectator made of it at the time: The missionary Bishop Heber wrote a hymn about Ceylon: 'Where every prospect pleases And only man is vile.' On being told that this was unfair to his converts, he corrected 'Ceylon' in the second edition to 'Java', but his point stands: there is no prospect, however pleasing, that is beyond the power of human and governmental incompetence to mess it up.
It’s another of those special Cameron victories in Europe: we’re in for a second Greek bailout, but not quite as much as we might have been. Britain will contribute a sum through the IMF; however, it will not be contributing to EU funds. Cameron has succeeded in ensuring that the European bailout will be conducted under the permanent European Financial Stability Facility (EFSF), to which only eurozone members are signatories. Although it should be noted that some Brussels experts doubt that the European Financial Stabilisation Mechanism (to which Britain has subscribed) could have been used in this instance, which further devalues the government's victory. Anyway, attention now turns to Greece and whether it will default.
At a time when the Euro is looking so weak, it is a wonder that so many countries are still queuing up to join. Estonia has recently joined, while Hungary and Bulgaria are keen as mustard to join as well. Make no mistake, these countries want to join. They go to lengths to stay for two years in the European Exchange Rate Mechanism, while keeping inflation inline with the EU average. At a meeting this morning, the Hungarian foreign minister capped off his country¹s EU Presidency by declaring that Hungary is still focused on joining. But, even if these countries did not want to join the Euro, or felt perhaps that the Greek crisis was a reason to postpone membership, they would have no choice.
Mark Hoban has just turned in a remarkably unconvincing performance at the despatch box. Summoned to the Commons to answer an urgent question from Gisela Stuart, one of the best backbenchers in the House, on what contingency planning the government was doing for a Greek default, Hoban attempted to stonewall. But Hoban’s stonewalling could only carry him so far. Strikingly, he declined several opportunities to confirm that the British government thinks that the euro will survive in its current form with all its current members. By contrast, Jack Straw was quite happy to make predictions. He told the House that ‘the euro in its current form is going to collapse.
Boris, we know, has never had any compunctions about distinguishing his views from those of the coalition government. Take his recent proclamations on the unions or on the economy, for instance. But his latest remarks are still striking in their forthrightness. Exhibit A is the article he has written for today's Sun, which — although it doesn't mention Ken Clarke by name — clearly has the Justice Secretary in mind when it exhorts that "it's time to stop offering shorter sentences and get-out clauses." And Exhibit B is his column for the Telegraph, which waxes condemnatory about Greece and the euro.
Europe is a doom-monger's paradise at the moment. Riots in Greece; summary Cabinet reshuffles; meetings between Merkel and Sarkozy to save the single currency — and there's still the potential for things to get worse, much worse. If the Greek government defaults on its debts, then there's no knowing where the contagion will spread, only that it it will spread wide: from Spain and Portugal to markets across the world. Share indices have already been trembling at the prospect, although many of them rallied slightly today. One consolation, however scant, is that all this crystallises just what can happen to governments who operate beyond their means.
The Harvard economist Martin Feldstein proposes an intriguing solution to Greece’s problems in his latest column: “A temporary leave of absence from the eurozone would allow Greece to achieve a price-level decline relative to other eurozone countries, and would make it easier to adjust the relative price level if Greek wages cannot be limited. The Maastricht treaty explicitly prohibits a eurozone country from leaving the euro, but says nothing about a temporary leave of absence (and therefore doesn’t prohibit one). It is time for Greece, other eurozone members, and the European Commission to start thinking seriously about that option.
As Obama and Cameron played table tennis yesterday, a considerably more furious game was being waged between the government and Tory backbenchers. It related to a Parliamentary motion tabled by Mark Reckless – and described here – that sought to stem UK involvement in any future bailouts for eurozone countries. All well and good, you'd think, until a rival amendment percolated down from on high to dilute Reckless's proposals. This new amendment would only go so far as to "urge the Government to raise the issue of the [bailout mechanism] at the next meeting of the Council of Ministers of the European Council". The green benches were set for a violent back-and-forth 'tween one side and the other. The outcome of all this was revealed yesterday evening.
Financial meltdown. As Ben Brogan says this morning, it tends to concentrate the mind. And so it is with the coalition, after days of infighting and spiteful diversion. The meltdown is not our own, of course, but that of the Greeks. And although much will be said by Conservative and Liberal Democrat politicians about how "there, but for the grace of George Osborne," etc., the real issue for them is simply this: how much are we in for? If Greece requires another bail-out, how much British money might be involved? Osborne himself – speaking across the news channels yesterday – has set out out a firm line. "We certainly don't want to be part of any bail-out of Greece," stresses the Chancellor.
How much are we in for? That is the question that springs most readily to mind after Portugal's request for fiscal aid from the EU. And, sadly, the answer is difficult to work out. The figures being spread around range from £3 billion to £6 billion, with valuations in between. But, really, it depends on how much of the €80 billion package is agreed to by European finance ministers, and which lending mechanisms are used. The European Stability Fund, the EU's emergency fund and the IMF's pot of gold all have differing levels of UK involvement. If our country does end up making a significant contribution to any bailout package, then the government will certainly have some explaining to do.
As if the budget and Libya weren’t enough, the UK Government woke up today with another major challenge on its hands – yet another flare-up in the eurozone debt crisis, which has been continuing to bubble away under the radar. Yesterday, Portugal’s Prime Minister José Sócrates literally walked out of Parliament, during a debate on EU-backed austerity measures. The austerity package was subsequently voted down and shortly afterwards Sócrates announced his resignation. Portugal is now facing the prospect of being without a government for months, as its electoral rules require a 55 day break between the dissolution of Parliament and new elections.
A Conservative Party article of faith has been the belief that other Europeans are innately more pro-EU than the British. In the past, this has undoubtedly been the case. Poll after poll has shown that Britons see the EU differently than most other Europeans. But as I have argued before, times are changing on the continent. In an article in the Frankfurter Allgemeine Zeitung (not a Europhile newspaper by any stretch), Germany's new politics is explained.
During the election campaign, Labour MPs and their supporters were most put out, offended even, by the suggestion that the rotten state of Britain's public finances placed us next to Greece in the basket-case category. And to be fair, these Labour MPs had a point: the structural deficit is serious but Britain, whatever its faults, isn't run like Greece. Which is just as well... Michael Lewis has been to Greece to report on their woes for Vanity Fair. The resulting piece is just as good and entertaining as you expect: “Our people went in and couldn’t believe what they found,” a senior I.M.F. official told me, not long after he’d returned from the I.M.F.’s first Greek mission.
Cuts are here. The most important news of the weekend was the G20’s official backing for spending cuts. It was a significant volte face, and doubtless the sight of violent uprisings in Greece concentrated minds. Finally, George Osborne has been vindicated; but having convinced finance ministers, he must now carry the coalition and the country with him. The first thing to do is ignore Nick Clegg and his claim that cuts will not be savage. Cuts will re-configure government in Britain, the current invasive Leviathan will be dismantled; but the process will be painful in the short-term, it must be.
Recent events in the Eurozone have led a number of commentators to suggest that we are nearing some repeat of the financial crisis that followed the nationalisation of Fannie Mae and Freddie Mac in August 2008 and the subsequent (and consequent) bankruptcy of Lehman's. In my view, the current situation is rather different from that in 2008, but matters could turn out much worse.
Angela Merkel's fall from favour is something David Cameron ought to bear in mind as he looks for lessons to guide his term in office. The German chancellor could do no wrong when she was first elected. A new "Iron Lady", she was seen as a giant among pygmees. Tony Blair was leaving the scene, Nicolas Sarkozy had yet to be elected, the newspapers swooned, the voters applauded. Mrs Merkel was respected in the US and Europe. She made her unwieldy coalition with the Social Democrats work, almost singlehandedly picked the NATO secretary-general and ruled over EU meetings.
I have just visited the two countries that are making the headlines in the European newspapers – Germany and Greece. During my trip, I met officials, journalists, and key advisers to both Prime Minister Papandréou and Chancellor Merkel. Sitting on the flight back to London I have regrettably come to the conclusion that the Euro is probably done for – or that Greece will default inside the Eurozone. Until now, I have dismissed the pessimists, thinking that the Euro would be saved. But after my trip I have changed my view for a number of reasons. Nothing I saw in Greece has convinced me that the Greek government is able, ready and willing to oversee the kind of austerity programme required to restore faith in its economy.
I am sitting in a busy café in Athens’s fancy Kolonaki district, watching the city’s elite stroll by in their well-fitting couture jeans, as the afternoon sun shimmers off the dusty streets. The women are weighed down by that most delightful of burdens -- shopping bags from the local FENDI shop -- and the latte I have just ordered comes at the recession-defying price of five euros. The regular demonstrations, which block the city centre and bring the police out in force, are now greeted with resignation rather than concern. It may take a little longer to travel home when the shops close -– which they do mid-day on Mondays, Wednesdays, and Saturdays (on Sundays they are closed all day) -- but summer is on its way.
European leaders have now agreed to bail out Greece in a coordinated affair, involving the IMF and bilateral assistance. The Times has written this up as a grab for more centralisation of policy-making by European Council President Herman Van Rompuy, but even the Tories know that’s not true, as judge by William Hague’s calm remarks. Trying to understand the problems of the euro has sent me back to my undergraduate economic textbooks and Robert Mundell’s work on optimum currency areas. As Spectator readers (many of whom are bankers) will know, the US economist theorised that a group of countries will benefit from a common currency like the euro if three conditions are satisfied. 1).
