From One Debt Bubble to Another – Europe is Rrunning out of Ideas

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Friday, 21 October 2011 08:15

europe_flagMany are holding their breath in anticipation that the eurozone summit on Sunday will result in an all-dancing, all-singing solution to fix the problems of the single currency – once and for all. Given the track record of snail-pace progress at these set-piece events, it seems unlikely. Germany has already said as much before the first word is spoken, in an attempt to downplay expectations. In fact, there is a risk that even a pumped up European Financial Stability Facility – with some economists and politicians suggesting a figure of €3 trillion will be necessary – would be a mere sticking plaster.

After all, we have previously moved the debt from the infamous NINJAs – no income, no job or assets – as the Americans call them, who were granted mortgages they could not afford, then on to the balance sheets of the banks – themselves recapitalised almost to the extent of nationalisation – meaning that the transfer of that debt to sovereign states was the final resting place, until now. Of course – problems of corruption, tax avoidance and mismanagement of public finances, in nations like Greece, and trader greed in financial services’ centres like the UK quickened the decline.

But do we really think that moving the debt one more time to a collective European fund will solve the problem? Especially, when you consider that – aside from Germany – European Union member states do not really have a surplus of cash to back such a fund, even in guarantee form. France, with its own severe debt problems, cannot hope to match any German financial support and the UK has no intention of contributing more than it has to through the International Monetary Fund. Inevitably, if the necessary money is eventually found, it is likely to come from the emerging powerhouse economies. Last weekend, at the G20, we saw murmurings of this when the BRICs – Brazil, Russia, India and China – looked at setting up a rescue package within the IMF, having tired of waiting for Europe to get its own house in order.

In the British newspaper The Times today, UK Tory peer Lord Wolfson has put up £250,000 of prize money for anyone, who can find an answer to the European debt crisis. He says: “There is now a real possibility that political or economic pressure may force one or more states to leave the euro. If this process is mismanaged it could threaten European savings, employment and the stability of the international banking system. This prize aims to ensure that high-quality economic thought is given to how the euro might be restructured into more stable currencies.” Applicants to the “Wolfson Prize” have until January to submit a 25,000-word blueprint. They say that desperate times call for desperate measures, but by January it may be too late.

In more bad news dispatches today, a two-day general strike was launched in Greece and Moody’s became the last of the “big three” rating agencies to downgrade Spain this month. Meanwhile, the EU has trumpeted its announcement of a ban on credit default swaps on sovereign bonds – or “naked” short-selling – as if it were the panacea to all of the problems faced by Europe. It is far from that. The ability for national regulators to suspend the moratorium remains in place and the ban will not come into effect until November 2012. Another “fudge” you can just hear the critics shout from the sidelines.

Despite the European commissioner for the Internal Market Michel Barnier’s claims that the measures “will ensure that sovereign CDS are used for the purpose for which they were designed – hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign-debt market”, it does feel distinctly like tinkering at the edges. In truth, what Europe needs right now is collective and radical leadership that recognises the continent’s weakened position and speaks with one voice to the emerging economies, which hold our future in their hands.

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