Bill Jamieson: Chill winds could wreck UK recovery

Published on 29/04/2012 00:00

‘We are not just flying through one of the stormiest and most turbulent periods in modern history, but flying blind’

mistral n. A dry cold northerly wind that blows in squalls toward the Mediterranean coast of southern France.

ON FRIDAY I was invited to address the annual conference of Geneva Group International on the future of the Eurozone. GGI is a discreet umbrella organisation for private, generally small scale accountancy, legal and business services firms drawn from round the world.

It seemed a straightforward assignment when the invitation came months ago. Some stabilisation looked to be settling in across the Eurozone, helped by the massive provision of ultra-low interest rates loans from the European Central Bank to commercial banks across Europe. I had not reckoned on the past week being one of the most troubling yet in the Euro crisis.

Some 15 minutes into the talk in the splendid art deco conference hall of the seafront Hotel Martinez, a strange and disturbing whistling sound began to emanate from the speaker system.

The effect was spooky, like the wind blowing through an abandoned and haunted Bates Motel, a musical score for some gothic horror movie. Edgar Allan Poe would have struggled to find a plot to do it justice.

GGI’s chief executive Michael Reiss von Filski, gallantly intervened to explain that the sound, seeming to coincide with the darkest passages on my presentation, was not a scripted effect from my laptop but an unscheduled – and wholly apt – intervention of nature.

This was the passing through of a mistral: one of those strange features of Cote d’Azur weather when a cold breeze strikes and yet there is still warm sunshine. The mistral blew its way through the hotel ventilation system to provide an aural theatre of menace.

How totally unscheduled – but also how appropriate. For the events of the past week have struck like a mistral across global markets. Our relapse into double dip recession in the first quarter could come to seem very tame compared with what may now be blowing towards us.

It is convenient – altogether too convenient some argue – for the UK government to blame the downturn in the single currency zone for our own depressing economic performance. But export-driven growth was one of the high hopes of recovery. And while the Eurozone continues to struggle and its recurring crises blight business confidence, it would be a blinkered version of reality that did not note the significance of last week’s developments. Our own recovery hopes hang by a thread. This latest mistral could blow them away.

Last week brought three developments which sparked a sharp sell-off in global markets. The first was Francois Hollande’s victory over Nicolas Sarkozy in the first round of the French presidential election. Narrow though the margin was, a socialist presidency committed to higher public spending and a 75 per cent top tax rate is now a real prospect.

Most significant of all for the Eurozone, Hollande has pledged to renegotiate the recently agreed fiscal stability pact, a move that could isolate Germany and pull the rug from under the entire programme of austerity economics across the single currency area. And this when, as we also learned last week, aggregate government debt across the Eurozone has now risen to 87.2 per cent of GDP, the highest since the launch of the single currency in 1999. As if all this was not enough to unsettle markets, the week brought news that Spain has slumped back into recession, that its unemployment rate has hit 24.4 per cent, putting it on a par with US unemployment in the 1930s Great Depression, and that the rating agency Standard & Poor’s has downgraded Spanish government debt by two notches to BBB+. It has also placed it on negative watch – a risk of further downgrades to come. The country’s troubled banks have had massive resort to the ECB’s low interest rate three-year loans, suggesting they may be in serious trouble.

But Spain, you may say, is not Greece. Indeed it is not. It is far larger. The default of the Eurozone’s fourth largest economy would shake confidence in the currency in a way that Greece, accounting for a tiny share of the Euro zone’s GDP, never did.

For good measure the coalition government of the Netherlands collapsed last week and the country, until now an ally of Germany in the austerity programme, has to present a new budget to the European Commission in the next few days and show that it is working to drive down the budget deficit to within three per cent of GDP. Greece, Ireland, Spain, Italy and now France and the Netherlands: governments have fallen and the central bank has had to resort to extraordinary and unprecedented measures. Last week confirmed that we are in a new era, a world without modern precedent in which almost all Western economies are gripped. It is this fact that accounts for this uneasy sense that we are not just flying through one of the stormiest and most turbulent periods in modern history, but flying blind.

A combination of Franco-German breakdown and a Spanish sovereign bond crisis would have the most worrying consequences for the UK.

We may think we can ignore this and plough our own furrow. This is fantastical. These developments cannot be pushed aside as irrelevant in our own little calculus of GDP gains and losses. That much was made clear in a chilling presentation later on Friday by Claudio Gocca, GGI’s president and founder. This, he warned, is how events could now unfold: Southern Europe goes into deep recession this summer. The new Greek government, faced with no sign of recovery, requests to leave the euro. In September a banking crisis erupts across Europe. Portugal then demands to leave the euro. Following pressure from the US, Eurozone finance ministers and central banks opt to launch a Eurobond, backed by the equivalent of a massive new IMF/US-funded Marshall Plan. It would be difficult for Germany to stand aside from this, or Britain to avoid a massive contribution, whatever the outcry.

Thus, how easily – and plausibly – a mild mistral on the Cote d’Azur could morph into an existential storm that would shake all assumptions about benign recovery in the period ahead.