As the key EU players come up with yet another vain attempt to mollify the markets, the Slog asks why our Government is simply going along for the ride.
(don’t think he knows)
There’s a new set of initials on the EU block, to go with most members’ necks: ESM. The European Stabilisation Mechanism.
Last Thursday on this blog, I wrote ‘…the European Union will be left with two less than desirable options. The first would be a full fiscal union under which everyone would be severally and separately responsible for all EU Sovereign debt. Not only does that have absolutely no chance of being accepted by member States, it would (a) be contrary to existing European Union treaties, and (b) be almost certainly unconstitutional in the Bundesrepublik. The second – far more likely option – would be letting member states default.’
As I predicted, the Franco-German Axis of Feeble has denied any possibility of doing the second, and watered down the first. Just like the euro itself, the ESM will be a mechanism without a driver.
But the flaws in this new ESM don’t end there.
First, its timescales are on a par with setting out a critical path analysis just after the Dambusters have flooded the Rhine.
“The message to the markets is that it will only come into effect in 2013, and there is nothing in there that the markets do not already know about,” a senior German official told the FT over the weekend, adding “Collective action clauses are already used in the US and UK.” Yes indeed they are, and a fat lot that has to do with the relative bond stability there: the trust in ourselves and the USA is based on the length of our bond debts going outwards, and our track-record of paying folks back.
Worse still, although in theory it addresses the issue of what happens when the current arrangements come to an end, anything to be phased in after 2013 would take six to eight years before even a majority of sovereign debt was covered by the scheme. This is pure Disneyland thinking.
As to the mechanics of the ESM, the proposal suggests that for future borrowing by eurozone members (ie, post 2013) there should be collective action clauses included in the contracts warning bondholders that they’ll be coughing up for some of the default, should it ever happen.
I applaud this in theory – it makes bankers responsible for the consequences of their aggressive credit marketing – but the equally obvious outcome is that lenders would make the yield demands higher in order to protect their margins. (The markets don’t do shared social responsibility). The Greeks, Portuguese and Irish debtors will be privately cursing the idea; but then it’s not for them….it’s to protect major banks in France, Germany, Holland and the UK from suddenly finding all their lent funds disappearing in a puff of smoke.
“The clauses make it easier to reach agreements between creditors and debtors to change the terms of a bond,” said one affably beaming German official. Do the creditors want it to be easier? Of course they don’t. Why lend money at crewcut rates to basket-cases when you can extend credit with more safety at a reasonable yield elsewhere? In the current environment, the answer is obvious. But not to the Eurocrats.
Much of that lending elsewhere will be to Anglo-Saxon and more stable South American countries. And some of it (stupidly) will head towards Russia. But we shouldn’t rub our hands with glee in the UK: our Irish exposure is the biggest in the EU, and we are up their with the idiots when it comes to the Latin member State debt exposure.
Perceptive German financial journalist Wolfgang Munchau continues to see Europe ‘edging towards the unthinkable’ – ie, eurozone collapse. I think he’s right: and the ESM is just another episode in the blasé smugness that began with the clueless observation of France’s Christine Lagarde last August: “There will be a stress test and after that all anxieties will cease”.
Behind it lies the cold thinking of bureaucratic bean-counters: the bail-out funds come to €925bn, and the risk is €1,070bn – so we need only find €145bn to fill the gap. Hurrah! It pays no regard at all to the fact that the cost of borrowing is heading for the ozone layer, or that one day soon no amount of yield will tempt the bond markets back. Or that by the time it comes into force, the EU as we know it may be a distant memory.
Above all, it shows the dumb ignorance of EU officials in a changing world: the bond market as we’ve known it is finished. This is not business as usual, it’s the beginning of the end of anything usual.
But if ineptitude and fantasy still rule in Brussels, Paris and Berlin, I’m at a loss for any words to describe the British performance to date. The Franco-German alliance is getting in the way of everything that needs to be done on many levels in Europe. Far from applying diplomatic pressure to supercede it with more UK presence, George Osborne and William Hague sit quietly by and watch as we are dragged into a mess that goes beyond self-infliction. What are they supposed to be doing?
Hague….eyes too fixed on the US
The Foreign Secretary is truly turning into William Vague. Last week at the NATO summit he said:
“Ah, er, well…I hope the eurozone survives, but who knows?”
Somewhere William, there’s a job for you as a surveyor. But until that happy day, the guy’s meant to be looking after our interests. He has spent more time over the last two weeks getting bankers out of Bahrain and bombers out of Guantanamo than everything else put together. In terms of market trustworthiness, the UK is holding all the cards: but the last time Hague spoke about the EU was November 11th, when he laughably ‘pledged’:
“We will give the public more confidence that they cannot have powers taken from them without a referendum.”
I’m afraid the elector confidence bank on resisting sovereignty losses to the EU is about as empty as RBS. And that’s also a problem for Draper Osborne, the man waving our flag in Brussels with great resolve. The only problem is that it’s whiter than white.
Already under pressure here at home to explain what he believes the Irish debt crisis might do to EU growth (and our banks) George’s ventures to Belgium have so far produced defeat on the Hedge Fund legislation, defeat on proposals for higher taxes on UK banks, defeat on new banker bonus controls, and a fudge on the pre-examination of UK Budget proposals in future. Whether one agrees with these ideas or not, little Gideon’s Bible on EU matters seems to be largely about lying spread-eagled in the path of every Brussels yardbrush that comes his way.
The assumption of the Treasury, the FCO and 10 Downing Street is that the EU is a done deal, and won’t go away ever. The lack of willingness to see how doubtful that now looks (or to have any real plan for alternative trading partners) sums up the myopic sloppiness of this Government. Indeed, the only good news for the Tory Party of late has been the re-election of Farage to be UKIP’s leader: were somebody credible in charge over there, Conservative supporters would be flocking to that banner in terrifying numbers.
The ESM is, I’m afraid, just another ping-pong bat thrown at the deluge heading Europe’s way. That deluge will ultimately destroy a crazy, half-baked continental union with no commitment to democracy, and even less to the idea of well-ordered commercial dynamism. Perhaps we should be pleased about that: but nobody of stature is stepping forward to fill that vacuum and establish some reality….and the ‘team’ we should blame above all others for that is the Cameroons. They lost the Election, they are losing to Brussels, and they are lost in a maze of cuts and compromises with no idea as to how growth can be kick-started. We may well be witnessing the end of the Conservative Party as a serious political force.
The Slog 