In the film Shakespeare in Love Queen Bess has to cross a muddy puddle. In a spoof of the Sir Walter Raleigh legend, she waits for a courtier to whip off his cloak. It takes too long, so, with an angry mutter of “too late, too late” the queen gets her feet muddy.
“Too late, too late” may prove to be the epitaph of Europe’s Âsingle currency, if the almighty crisis now brewing ends in catastrophe. Financial markets have turned on one of the weaker members of the single currency, pushing up the cost of financing its debts.
The country in the firing line this time is Italy, which accounts for 20% of the eurozone’s output, as opposed to Greece’s 3%. Italy went into the monetary union with high levels of national debt and has struggled to live with the disciplines of the club. In the past decade it has lost competitiveness to Germany and can no longer respond by devaluing the lira, which it did regularly when it had its own currency.
Europe’s policymakers have announced debt restructuring for Greece, which should have been considered months ago. Instead it surfaces as the European Union (EU) prepares to announce the results of stress tests on its banks, designed to show how resilient the financial sector is. Last year the tests were so easy that all but a handful of banks passed. This year many more banks (25% or more, according to the latest rumours) will fail.
Europe has a spreading sovereign-debt problem that makes life more difficult for banks and Âdithering politicians. The European Central Bank should be openly active in the financial market, buying up the debts of those countries under pressure. Individual countries should be allowed to convert some of their national debt into EU bonds, which would reduce the cost of financing their debts. It would also mean losses for bond holders, but not as big as those they would face if the euro went belly up.
Stuart Holland, economist and former Labour MP, argues that the European Investment Fund should issue new tradeable bonds to pay for growth-boosting infrastructure projects across the eurozone. But Europe may not be ready for such radical suggestions. A collective solution will be costly: some estimates put the price tag at €2-trillion.
Policymakers may prefer to stick to the current mantra of austerity, austerity and still more austerity. But they are dicing with disaster.
Privately, some senior bankers are saying Europe has a matter of days to get its act together before an implosion of the single currency triggers a second phase of the global financial crisis.
That would make the 2008-2009 recession look mild. —