Comment: Pain in Spain a headache for everyone

TWO telephone calls out of the blue at the end of last week brought disturbing news. The first was from a well-connected source in Brussels; the second from a contact in Spain.

The source from Brussels had been speaking to a senior Spanish finance official. If the world was waiting for a Spanish government “plan B” to deal with the country’s deepening banking crisis, he warned, don’t stay up long for it. There isn’t one.

The second call alerted me to a growing apprehension among British expatriates in Spain wondering whether to move their savings out of Spanish banks. This information came with a query. Were there to be a retail run on a Spanish or Greek bank, a là Northern Rock, who or what could halt it?

In the torrent of comment and analysis over events in the Eurozone in the past week, no question cuts further to the chase than this: who is good for the money?

Clearly a growing number are not too sure, otherwise investors would not be dumping bank shares across Europe and depositors would not be withdrawing their money. Estimates of withdrawals from Greek banks in the immediate aftermath of the deadlocked election vary between ¤700 million (£560m) and ¤1.2 billion: worrying, but not alarming given total deposits reckoned at some ¤160bn.

The good news is that this exodus is not as pronounced as it was last year. Much “high end” Greek money has already fled.

The bad news is that, while the sum may be smaller, the number of people doing the withdrawing may be larger – and growing.

Capital flight is both a highly dangerous effect and cause of financial instability. Once underway, it is difficult to halt unless, as with US Treasury secretary Hank Paulson’s “bazooka” at the height of the American banking crisis, official intervention is both massive (much larger than expected in the markets) and swift.

The problem in the Euro-zone is that there is no authority willing or able to act in a similarly decisive and effective manner. If the result is social disorder it paves the way for resort to the military. If Eurozone member governments, separately or collectively, are reluctant or powerless to act, the buck passes instantly to the European Central Bank. But the ECB is deeply reluctant to take action it believes is the responsibility of governments. It is resisting to the last the role of lender of last resort.

As a result of this stand-off, markets, well sensing this danger, have been dumping Eurozone assets – government bonds, bank paper and equities. Sovereign bond yields are back to crisis levels and billions of pounds have been wiped off share values.

This is a defining crisis for Europe. It begs the most searching questions as to cause and consequence. Many hands have played a part in this: the Greek government for its debt and deficit profligacy (and duplicity over Euro entry statistics); the lenders for feeding the property and construction bubble in Spain; politicians for allowing government spending and borrowing to get out of hand; and Eurozone officials who have consistently responded too little and too late.

But the prime mover was the politically motivated drive to a “one size fits all” monetary and interest rate regime over economies with sharply differing characteristics and dynamics. This was the reigning error from the start. It is difficult to see how the euro can survive and there is now a gathering consensus around what until recently was unmentionable in Brussels: the exit of Greece from what was deemed an “irrevocable” union.

There is nothing “irrevocable” in economics. Some desperate bitter-enders for the single currency believe the best prospect for its survival now rest on such a disorderly exit by Greece that the other weak members will recoil in horror from going through the same experience. This is the economics of the madhouse.

In the cause of this monetary experiment the economies of Greece, Spain, Portugal and Ireland have been crippled. About the best hope for the southern Mediterranean countries now is that the informal sector will provide some cushion through the coming storm. But this cannot be a substitute for profound re-thinking within Europe as to what are the genuine sources of economic growth. This, however, is unlikely to prevent the interventionist junkies from continuing to call for more debt and more borrowing as the “solution”.

In the meantime prospects for global growth are struggling under the pall of the Eurozone crisis. Here in the UK business confidence is being hammered by the week. It is now almost certain that the “contingency planning” being undertaken in the Treasury and the Bank of England to deal with a disorderly Eurozone default and exit will include an early resumption of quantitative easing and, possibly, resort to fiscal stimulus. This biggest U-turn of all will be blamed squarely on the need to respond to the threat posed by the euro crisis. But it could prove politically devastating for Prime Minister David Cameron and Chancellor George Osborne.

As to where the buck stops, this looks to be heading towards a massive global IMF-led bazooka – and a humiliating rescue of Europe’s economies from the single currency debacle.

Hard rain falling

While it has hotted up in the Eurozone, Scotland continues to shiver in the coldest spring for years – and with dire consequences for the hotels, tourism and retail sectors. Persistent rain and freezing temperatures have left hotels, restaurants and guesthouses struggling for survival.

The grim consequence will be a sharp upturn in business failures later this year.

The tourist and retail trade plight may now be much worse than suggested by the latest report from accountants and business advisers PKF. This found a 0.1 per cent fall in occupancy during March, when Scotland had the lowest occupancy figure (66.6 per cent) of any part of the UK), compared with an increase of 2.7 per cent in regional UK. There has also been a fall in room revenue. Other business surveys suggest that more than a fifth of Scottish hotel businesses are at risk of failure within the next 12 months.

The lists of business for sale in Edinburgh are already dominated by restaurants and café bars, while clothes and gardening retailers are being battered.

Appalling weather through April and May, with sad figures huddled on the top of rain-lashed tourist buses, is adding to the woes of an already frail retail sector. Expect this weather misery to dampen those upbeat business growth surveys in due course.