For years, regulators have been trying to control bad banking. Governments have been failing to control bad sovereign fiscal governance. That’s the nature of the Eurozone. This flawed approach has only left one solution – at some stage, both the banks and sovereigns will have to be properly underwritten by the European Central Bank (ECB).
One day soon, the ECB will become the lender-of-last-resort.
However, possibly for reasons of either dull-wittedness or maybe just some good old-fashioned showmanship, the ECB never makes a move until there is a proper danger of a crisis. (Think Superman grabbing that train on a railway bridge just seconds before it falls into the ravine.)
Unfortunately, this economic scenario appears to be played out on a perpetual “loop”.
Déjà vu Economics.
Currently, markets are once again applying severe pressure to Eurozone public debt and Euro politicians are repeating the “We are determined” and “Whatever it takes” mantras. The markets continue to fluctuate “in vacuo” with little regard to the “real” conditions, further confusing the politicos who, for some unknown reason, believe that the solution to everything lies in greater Eurozone union and organisational changes. (Bless them! It’s all they know!)
The next stage is simple (and it began last week): a few mealy-mouthed statements from Euro leaders which attempted to shove the crisis-cursor forward a few weeks until after the end of the Summer Holidays – whilst Spain and Italy (both standing on the trapdoor) have issued “holding statements”.
The well-worn and rapidly failing policy response from the Euro Gods is those potentially explosive “Austerity Measures” – the only other technique in their repertoire. Yet another case of the cure being more painful than the disease. Ask Greece.
In 2010, the Greek Government (just before it lost access to the markets) po-pooed the idea of needing help. “We are not Latin America!” they scoffed. Now it’s Spain’s and Italy’s turn: “We are not Greece!”
Oh yes you are – only bigger, hungrier and therefore more dangerous – and remember this, when you too lose access to the markets, you will need a bailout.
Euro politicians do play with a very limited repertoire, so Spain and Italy will have yet more austerity. That will accelerate the deterioration of their economies – although their politicians will talk (a lot) about “growth”.
This (just like in Greece) will result in lower tax revenues and austerity targets being missed (although the “Troika” continues to believe that, contrary to all the evidence, an economic miracle will manifest itself . Suddenly, as if by magic, they hope that the Perpetual Spring of Eternal Economic Growth will materialise out of the ashes of Austerity!!).
Then, the banks will need yet more and we’ll end up discussing when Spain and Italy will leave the Eurozone. Then France…..
That will return the cycle to Square One with the politicians once again being “Determined” and promising to do “Whatever ir takes”.
Another dose of Déjà vu Economics.
Meanwhile, should the crisis look really dangerous, the ECB’s Marion Draghi will find a telephone box, change and fly-in to save the day. “To calm the Markets”
The banks have spent four years watching and secretly hoping that this ridiculous loop continues forever, Why? Because once the ECB steps in and protects sovereign debt, those debts will have a price. Banks will have to revalue any debt they are holding (downwards), resulting in quite a few of them going to the wall.
There will be yet more “haircuts” for private investors too!
Just like a rapidly expanding non-working retired population needs more and more support from an increasingly taxed but shrinking working population, so the Eurozone is becoming an arrangement whereby more and more non-producing and increasingly reliant countries have to be supported by a rapidly shrinking collection of fully-functioning states.
The tipping point is not too far away – the point at which there are more (economically) broken states than those in reasonable health which can continue to support them.
Meanwhile, let’s have some more Déjà vu. Again.