NEWS of the ‘euro-crisis’ as reported in the British press this week comes as no surprise.
The ‘contagion’ has spread to Italy, the third largest economy of the euro-zone, with the financial markets of the world downgrading Italian bonds.
So what does the European Central Bank (ECB) do to counter this? It increases the bank-rate, the cost of borrowing, possibly the most damaging action, and at the worst possible moment. It did the same thing in 2008 on the back of a shock rise in oil prices, when several EU states were already in recession, and as one financial journalist has commented: “Once is careless. Twice is unforgivable”.
It makes one wonder what planet these senior bankers actually inhabit. The EU has also chosen a particularly strange time to continue its ‘Stress Tests’ on European banks.
Mere rumours are dangerous enough – witness the 8 percent fall in the share price of Unicredit Spa, Italy’s largest bank last week, and some observers are warning even now that the ‘contagion’ might soon spread to the big economies which already have little room to manoeuvre.
Germany, the euro-zone’s strongest economy, has more or less ruled out any further aid, calling for more ‘frugality’, and saying that any boost to the EU’s bail-out machinery is ‘out of the question’,
It has been rumoured also that the ECB, by buying Italian Bonds when the international moneymen were writing them down, managed, temporarily, to stave off disaster, but suppose your High Street Bank did the same, granting loans to a failing company, but then, when it looked as if this might have been a poor decision, bought back some of the debt?
But of course, the ECB is not a business in the normal sense. If it were, and was subject to the same European Banking Authority (EBA) ‘stress tests’ as ordinary commercial banks, it would probably fail, and yet this is the EU equivalent of the USA’s Federal Bank.
Jose Manuel Barosso, the President of the EU Commission, was most scathing when Moody’s, one of the world’s most respected financial analysis firms, downgraded Italy’s international credit rating, but Italy has to find €63 billion in August and September, and will have to tap the markets for another 500 billion by late 2013; so who’s right, Barosso or Moody’s? Commentators are demanding that Italy should at least get the political situation sorted out. It has no effective Government at present, and as the respected Italian newspaper ‘La Repubblica’ has said: ‘What other country would allow itself the suicidal luxury of offering cynical markets such an example of political disintegration at a time when Europe is haunted by contagion?’
The total collapse of the euro becomes a real possibility if Italy, which has shown zero growth for the last six years, finds itself requiring a ‘bail-out’.
Germany insists it will not put more money into the ‘pot’, and bearing that in mind, what would the IMF do? The Single Currency and Political Union were designed to work in tandem.
If one should fail, so will the other – which might after all be the best, and perhaps the only, long-term solution.