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Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Dating Offers Jobs Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money DealsJeremy Warner
Jeremy Warner Europe must grasp its chance to turn off the doomsday device Damian Reece This is a German banking crisis - and they must lead the clean-up Ian Cowie Why 50pc tax row misses the point: what about the squeezed middle? Richard Blackden The online gambling battle is being won in America â?? just not by the DoJ Europe must now grasp its chance to turn off the doomsday device The G20â??s 'grand planâ?? discussed in Washington is far from perfect â?? but it could buy enough time to defuse the euro crisis. US Treasury Secretary Tim Geithner told the IMF that 'decisions as to how to conclusively address the region's problems cannot wait' Photo: REUTERS8:55PM BST 28 Sep 2011
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Benjamin Franklinâ??s famous remark that â??we must indeed all hang together, or, most assuredly, we shall all hang separatelyâ? was much in use among G20 finance ministers last week, meeting in Washington to address the crisis facing the eurozone.
There was always a delicious ambiguity about this observation, which is even more apparent when applied to the travails of the single currency. Franklin could have meant that it is better to act together in pursuit of salvation than to face the noose alone â?? or simply that, if youâ??re going to die anyway, itâ??s nice to have some company on the gallows.
As far as the eurozone is concerned, the latter interpretation is starting to look depressingly convincing. The probability of the 17 member states going down together, and pulling Britain and much of the rest of the world with them, is rising by the day.
Right from the start, the eurozoneâ??s problem has been that it seems incapable of the collective, timely and decisive action that crises always require. This is not surprising, since we are not talking about a single political entity, but a confederation of independent states, each answerable to its own electorate. Such a structure makes crises both inevitable, and virtually impossible to resolve. Itâ??s not just that there is no one in charge: itâ??s that no one can agree. Rival interests ensure rival agendas. In this instance, whatâ??s needed to halt the meltdown in the peripheral nations is proving unacceptable to the Germans and their allies at the core. European solidarity is giving way to ever greater division and infighting.
As confidence drains away, what Tim Geithner, the US Treasury Secretary, refers to as â??the threat of cascading default, bank runs, and catastrophic riskâ? is already upon us. Speaking at the IMF, he insisted that â??decisions as to how to conclusively address the regionâ??s problems cannot wait until the crisis gets more severeâ? â?? part of a concerted international campaign to bounce Europe into action.
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15 Sep 2011As it stands, the single currency has become a doomsday machine, driving Europe and the rest of the world ever closer to financial collapse. Can it be switched off in time? So far, the signs are not encouraging. As The Daily Telegraph reported last weekend, there is a â??grand planâ? for saving the euro circulating within the G20, involving a bigger bail-out fund, the recapitalisation of Europeâ??s banks and a Greek default on realistic terms. But this has already run into the immovable object of the German veto: Wolfgang Schäuble, Angela Merkelâ??s finance minister, dismissed it out of hand.
In the markets, there is a widespread assumption that Schäuble doesnâ??t really mean it â?? that when push comes to shove, and todayâ??s vote in the German parliament on last summerâ??s rescue package is safely out of the way, heâ??ll do whatever is necessary. But if he does, heâ??ll almost certainly lose his job, and very likely pull Germanyâ??s coalition government down with him. A financial crisis will have been transformed into a political one, and the democratic deficit at the heart of the European project will have reached new bounds.
No one can be in any doubt about where this is all heading. In his state of the union address to the European parliament yesterday, the Commissionâ??s president, José Manuel Barroso, insisted that all changes to the rules governing the euro should in future be left to him and his officials, rather than national parliaments. Against fierce British opposition, he also called for a financial transaction tax to repair public balance sheets, even though the ECâ??s own analysis shows that it would be deeply damaging to growth.
Behind these ructions lies a dogged refusal to acknowledge the root cause of the problem. Angela Merkel this week insisted that this is not a euro crisis at all, but a debt crisis. Sheâ??s half right: the imbalances at the heart of the eurozone are part of a global problem which affects Britain and the US almost as badly as Spain or Ireland. But what the euro has done is fan the flames, as well as removing the mechanisms with which free-floating currencies can correct such problems.
In aggregate, Europe doesnâ??t have a debt problem at all. As a proportion of GDP, public debt remains well below that of the US. Two of the afflicted nations, Ireland and Spain, had budget surpluses going into the crisis, while across the eurozone, levels of household debt remain generally subdued. Italyâ??s public debt looks eye-wateringly high, but aggregating all debt together â?? public, private, household and financial â?? Italy looks a paragon of virtue compared to the UK and US.
If you misdiagnose the problem, you are highly likely to end up with the wrong medicine. And thatâ??s precisely whatâ??s happening right now. Unable to employ the standard techniques for restoring competitiveness to wayward nations, Europe is attempting to impose them from the inside. Ironically, these measures are proving far more brutal and self-defeating than the markets would ever dare contemplate. Internal devaluation, as opposed to the external one that a sovereign currency allows, is politically and socially devastating. Several European countries are close to outright insurrection.
Unfortunately, the integration of trade and finance has gone too far to allow for a painless reversal. Once youâ??ve made the omelette, it cannot be unscrambled. In a recent analysis, the investment bank UBS put the costs for a weak country leaving the single currency at between 9,500 and 11,500 euros per capita in the first year (or 40 to 50 per cent of GDP), and up to 4,000 euros a year thereafter. Even for Germany, the costs would be prohibitive â?? between 6,000 and 8,000 euros in the first year for every man, woman and child.
There is reason for scepticism about these figures: many would quarrel with UBSâ??s motives and methodology. But we are only dealing with differences of degree. For any country, the consequences of quitting the euro â?? in terms of sovereign, corporate and banking-sector default â?? would be extreme. So weaker nations face an impossible choice between sudden death and death by a thousand cuts.
In such circumstances, least worst options have to be considered. The â??grand planâ? discussed in Washington is objectionable on many levels â?? but it probably offers the best hope of avoiding a catastrophic break-up of the single currency, or a disorderly series of defaults.
Of course, to call it a â??planâ? is somewhat premature. There are any number of permutations under discussion. Even with
Jeremy Warner
8:55PM BST 28 Sep 2011
Comments
Benjamin Franklinâ??s famous remark that â??we must indeed all hang together, or, most assuredly, we shall all hang separatelyâ? was much in use among G20 finance ministers last week, meeting in Washington to address the crisis facing the eurozone.
There was always a delicious ambiguity about this observation, which is even more apparent when applied to the travails of the single currency. Franklin could have meant that it is better to act together in pursuit of salvation than to face the noose alone â?? or simply that, if youâ??re going to die anyway, itâ??s nice to have some company on the gallows.
As far as the eurozone is concerned, the latter interpretation is starting to look depressingly convincing. The probability of the 17 member states going down together, and pulling Britain and much of the rest of the world with them, is rising by the day.
Right from the start, the eurozoneâ??s problem has been that it seems incapable of the collective, timely and decisive action that crises always require. This is not surprising, since we are not talking about a single political entity, but a confederation of independent states, each answerable to its own electorate. Such a structure makes crises both inevitable, and virtually impossible to resolve. Itâ??s not just that there is no one in charge: itâ??s that no one can agree. Rival interests ensure rival agendas. In this instance, whatâ??s needed to halt the meltdown in the peripheral nations is proving unacceptable to the Germans and their allies at the core. European solidarity is giving way to ever greater division and infighting.
As confidence drains away, what Tim Geithner, the US Treasury Secretary, refers to as â??the threat of cascading default, bank runs, and catastrophic riskâ? is already upon us. Speaking at the IMF, he insisted that â??decisions as to how to conclusively address the regionâ??s problems cannot wait until the crisis gets more severeâ? â?? part of a concerted international campaign to bounce Europe into action.
Recession pre-baked as Eurozone dithers
£1.7 trillion 'firewall' fund readied to save euro
â?¬2 trillion bailout fund planned to save euro as Greece faces default
Peter Oborne: the great euro swindle
UK should prepare for leading role in more dynamic Europe
Central banks do not normally take this kind of action
As it stands, the single currency has become a doomsday machine, driving Europe and the rest of the world ever closer to financial collapse. Can it be switched off in time? So far, the signs are not encouraging. As The Daily Telegraph reported last weekend, there is a â??grand planâ? for saving the euro circulating within the G20, involving a bigger bail-out fund, the recapitalisation of Europeâ??s banks and a Greek default on realistic terms. But this has already run into the immovable object of the German veto: Wolfgang Schäuble, Angela Merkelâ??s finance minister, dismissed it out of hand.
In the markets, there is a widespread assumption that Schäuble doesnâ??t really mean it â?? that when push comes to shove, and todayâ??s vote in the German parliament on last summerâ??s rescue package is safely out of the way, heâ??ll do whatever is necessary. But if he does, heâ??ll almost certainly lose his job, and very likely pull Germanyâ??s coalition government down with him. A financial crisis will have been transformed into a political one, and the democratic deficit at the heart of the European project will have reached new bounds.
No one can be in any doubt about where this is all heading. In his state of the union address to the European parliament yesterday, the Commissionâ??s president, José Manuel Barroso, insisted that all changes to the rules governing the euro should in future be left to him and his officials, rather than national parliaments. Against fierce British opposition, he also called for a financial transaction tax to repair public balance sheets, even though the ECâ??s own analysis shows that it would be deeply damaging to growth.
Behind these ructions lies a dogged refusal to acknowledge the root cause of the problem. Angela Merkel this week insisted that this is not a euro crisis at all, but a debt crisis. Sheâ??s half right: the imbalances at the heart of the eurozone are part of a global problem which affects Britain and the US almost as badly as Spain or Ireland. But what the euro has done is fan the flames, as well as removing the mechanisms with which free-floating currencies can correct such problems.
In aggregate, Europe doesnâ??t have a debt problem at all. As a proportion of GDP, public debt remains well below that of the US. Two of the afflicted nations, Ireland and Spain, had budget surpluses going into the crisis, while across the eurozone, levels of household debt remain generally subdued. Italyâ??s public debt looks eye-wateringly high, but aggregating all debt together â?? public, private, household and financial â?? Italy looks a paragon of virtue compared to the UK and US.
If you misdiagnose the problem, you are highly likely to end up with the wrong medicine. And thatâ??s precisely whatâ??s happening right now. Unable to employ the standard techniques for restoring competitiveness to wayward nations, Europe is attempting to impose them from the inside. Ironically, these measures are proving far more brutal and self-defeating than the markets would ever dare contemplate. Internal devaluation, as opposed to the external one that a sovereign currency allows, is politically and socially devastating. Several European countries are close to outright insurrection.
Unfortunately, the integration of trade and finance has gone too far to allow for a painless reversal. Once youâ??ve made the omelette, it cannot be unscrambled. In a recent analysis, the investment bank UBS put the costs for a weak country leaving the single currency at between 9,500 and 11,500 euros per capita in the first year (or 40 to 50 per cent of GDP), and up to 4,000 euros a year thereafter. Even for Germany, the costs would be prohibitive â?? between 6,000 and 8,000 euros in the first year for every man, woman and child.
There is reason for scepticism about these figures: many would quarrel with UBSâ??s motives and methodology. But we are only dealing with differences of degree. For any country, the consequences of quitting the euro â?? in terms of sovereign, corporate and banking-sector default â?? would be extreme. So weaker nations face an impossible choice between sudden death and death by a thousand cuts.
In such circumstances, least worst options have to be considered. The â??grand planâ? discussed in Washington is objectionable on many levels â?? but it probably offers the best hope of avoiding a catastrophic break-up of the single currency, or a disorderly series of defaults.
Of course, to call it a â??planâ? is somewhat premature. There are any number of permutations under discussion. Even without Germanyâ??s objections, securing agreement across the eurozone in the six weeks that international policy-makers have demanded is almost impossible.
All the same, thereâ??s something here â?? something thatâ??s just about big enough to resolve the immediate crisis, and just about small enough to be politically acceptable. If it can be agreed, it may keep the show on the road for a little longer. But until Europe establishes permanent mechanisms for fiscal transfers, and the democratic institutions to underpin them, the sense of impending disaster will never go away: the eurozone will just lurch from one calamity to the next. Even if it survives this crisis, the next will surely sink it.
Europeâ??s leaders should therefore use any breathing space that a rescue plan provides to reconstitute the euro in a more sustainable fashion â?? say along the lines of a north/south split. For it is plain to everyone, other than its leaders, that it cannot survive as it is.
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