Leader: Banking on the ECB

Published on Saturday 5 November 2011 21:19

TURMOIL in the Eurozone is increasingly destabilising the global economy and the political process across Europe. The most toxic form of contagion is fear; it is on fear that speculators trade, since panic provokes the extravagant mood swings in the markets that generate their short-term profits.

The danger now is that governments will be too paralysed by fear and mutual suspicion to implement coolly, logically and collaboratively the measures required to address the Eurozone crisis. The first requirement is to dispel the myth that the euro’s problems are an extension of the banking crisis that erupted in 2008, with the debtor nations in the same role as the banks that failed during that financial meltdown. That parallel is false. The situations are quite different.

The cause of the banking crisis was people being given mortgages they could not hope to pay and banks trading these as if they were sound. The whole thing was fundamentally rotten. The sovereign debt crisis now afflicting Europe is of a different order. The underlying economies and latent wealth of most European nations are sound; even the supposedly sub-prime southern Eurozone countries, with the exception of Greece, share that fundamental strength. It gives us no pleasure to agree, for once, with Silvio Berlusconi; but when the Italian prime minister shrugs and says Italy’s hotels are full, the restaurants are full, the flights are full, and asks what is the problem, he has a point.

The depiction of Italy as a basket case, when it is the eighth largest economy in the world in terms of nominal GDP, also a G8 member and with almost 300,000 of its citizens millionaires, is absurd. It has no housing bubble since lenders have been stringent about collateral, its banks are almost free of toxic liabilities, its citizens have one of the highest savings rates in Europe and low household debt at around 40 per cent of GDP, compared with 106 per cent in the UK. Its Achilles’ heel is a sovereign indebtedness running at ¤1.9 trillion (120 per cent of GDP): politicians and bad government have brought the country to its present crisis. Berlusconi’s agreement to allow the IMF to monitor Italy’s austerity reform programme is a significant concession because it shows both willingness to change and acknowledgement that independent proof of change is required.

Yet, once they have picked Greece’s bones white, the speculators intend to move on to Italy. What is needed is for the European Central Bank to become a proper guarantor for Eurozone nations. It needs to fulfil for Europe the role that the Bank of England performs in the UK and the Federal Reserve in the United States; otherwise, what is the ECB for? At present it is prevented from taking on that responsibility by the Treaty of Lisbon, a restriction rigidly policed by Germany, with its post-Weimar neurosis about central banks printing money, inflation, et al. Germany has been generous and strong in its defence of the euro, but it needs to go all the way. And yes, if it is necessary for Greece to tumble out of the Eurozone to land on its feet, then let that country go. The only reason for fearing Italy would be the next domino down is the current veto on the ECB playing a useful role as lender of last resort.

David Cameron can expect renewed rebellion from Eurosceptic back-benchers over his plans to donate billions of pounds to the IMF. This ploy is an irrelevance: it is not for the IMF, but the ECB, to sustain what is the fundamentally sound economy of the European nations against government profligacy and attack by speculators. That will require treaty revisions which will bring more parliamentary grief for the Prime Minister; but quick and decisive reform of Europe’s systemic vulnerability is more important than domestic party bickering.

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