TOMORROW I am off to Berlin and Frankfurt, courtesy of the German foreign office, to be briefed by the Bundesbank and European Central Bank (ECB) on the latest stage of the euro debt crisis.
Currently we appear to be in a quiet period between euro squalls, thanks to the daring move by the ECB’s new boss, Mario Draghi, to pump some £400 billion in cheap liquidity into Europe’s banks in December and February. This timely intervention saved banks from crashing and restored confidence (a bit). As a result, investors are buying euro sovereign debt again, reducing the cost of borrowing for the weaker members of the eurozone.
The ECB itself hasn’t needed to buy eurobonds for some weeks, prompting Draghi to announce on Thursday that “the worst is over”. But as befits a cautious central banker, he went on to warn: “there are still risks”. His subtext was that the ECB has bought time, now it is up to the eurozone governments to put their fiscal house in order.
I agree with Draghi that he has bought time. I don’t agree we are out of the danger zone.
For a start, Europe’s risk-averse banks are still not lending to each other so the basic credit mechanism remains broken. Instead banks are parking their liquid cash at the ECB’s overnight facility – over £600bn this week. As a result, the Europe’s economy and consumers are being starved of credit.
Witness the recent rise in mortgage rates across Europe. Banks in Italy, Portugal and Spain have increased rates between one and two points. In Britain, Lloyds and RBS have just announced increases on standard variable mortgages. This is putting a damper on the housing market, which in turn affects consumer confidence and growth. The latest data shows the eurozone economy contracted more sharply than expected in March.
Of course, it’s early days yet. The huge wadge of ECB loans could eventually leak out into greater commercial bank lending. However, the ECB liquidity has to be repaid in only three years, so I doubt if it can ever have a significant impact on commercial bank loans, which are of a longer duration.
Which means the European economy remains fragile until there is a genuine, long-term fix for the debt crisis. Without that, European banks – which still hold a lot of eurobonds in their portfolios – will remain risk-averse. As Draghi says, the ball remains firmly with eurozone governments. But that’s exactly where the problem lies.
The bind Europe finds itself in is that the profligate southern eurozone members cannot wean themselves off borrowing unless they grow their economies. With currency devaluation ruled out, all they can do is deflate internally via recession in the hope of cutting wage costs. But that means civil unrest.
Draghi is Italian. The Italian economy is forecast to contract by 2.2 per cent this year. Italy’s unions have just announced a general strike to oppose labour market reforms. QED.
Plane and simple, don’t look past Scotland
IN his first Budget back in 2010, George Osborne announced he would set up a Green Investment Bank.
Noticing this throwaway line, I suggested (here) that Edinburgh would be the ideal place to locate the corporate HQ. This was taken up by city MP Mark Lazarowicz, who mobilised the Chamber of Commerce. Hey presto, earlier this month it was announced that Edinburgh would host the GIB, with a fund-raising unit in London.
Here is a similar notion prompted by the latest Osborne Budget.
On Wednesday, the Chancellor offered £60 million to create a UK “Centre for Aerodynamics” to commercialise new ideas in aerospace design. The winning location will be decided next year but already Bristol and Manchester have thrown their civic hats in the ring.
Why not Scotland, and especially our aerospace hub around Prestwick?
Scotland is remarkably amnesiac about its world-class aerospace design and manufacturing capability. Yet we make everything from wing components for the latest Boeing and Airbus airliners to the seat covers for Roman Abramovich’s private jet.
Prestwick is host to US aerospace giants including Spirit, Goodrich and GE, whose Scottish plant has been chosen as the global base for maintaining the company’s “next generation”, super-efficient jet engines.