The Guardian has diverted me from the big story. Just as feared on this site, the bungling Euromantics have shaken the financial world with their clumsy scheme.
They have rejected the least bad answer – asking the most heavily indebted countries who broke their sensible rules on debts and deficits to leave the currency. They have rejected the answer of Germany leaving to re-establish the DM with a handful of smaller stronger countries. Just as they did with the ERM, so they are doing with the single currency. Inflict maximum pain on as many as possible, until the markets make the whole thing impossible. Watch unemployment rise, incomes fall, and say it is all worth it.
Instead they imply they are going for the answer of creating a country called Europe to back up the single currency. They are implying they are moving to a world where the rich underwrite the poor and the strong support the weak across the Euro area. Yet when it comes to passing landmarks on this journey, Germany refuses. There are to be no common Euro area bonds, allowing the weaker states to borrow on a common credit rating. There is to be no increase in the stabilisation funds. There is uncertainty about the size and commitment behind the ECB intervention programme. It is always too little , too late.
As a result the markets are spooked. Investors fear for the state of some EU banks. These banks have been encouraged or made to buy large quantities of sovereign bonds. These bonds are now in question, leading to worries about the strength of the banks that own them. Greek and Portuguese bonds have fallen massively in price. How far could Italian and Spanish bonds fall? What would that do to continental banks? As the sovereigns are financially overstretched already, who will bail out any bank in trouble in the weak countries?
German and French growth has already come to a grinding halt. Growth is needed to generate the extra tax revenues to pay for the large public sectors these countries like. The glacial progress to a transfer union, where the debts of all are guaranteed by all, and to a subsidy union where the rich recognise their obligation to the poor across frontiers, leaves the whole system very vulnerable to market fears.
At the same time Mr Obama spooked the US markets by his refusal to rule out the US reneging on debt in the crisis talks over the debt ceiling, and then again by his failure to reach agreement with his political enemies over how quickly and how to cut spending to control the deficit in the US. A few bad figures recently on US economic growth finished the markets off.
On both sides of the Atlantic governments are running out of time to have plausible ways of cutting their deficits and controlling the debts. The EU version is gravely compounded by the failure to offer strong leadership to maintain the single currency, and refusal to split it up. We are heading for a prolonged period of slow growth at best, with continuing alarms on the credit worthiness of individual states, and over the consequential weakness of various banks. There is still scope for disaster, if the authorities do not grip the problem more strongly.The slower growth is, the worse the deficits will be. It is easy for the overborrowed states to get into a vicious circle from here, slower growth, rising deficits, more tax rises, slower growth.
There was one bit of good news this week. The latest UK borrowing figures show that thanks to the banks tax revenues rose well last month. It was also the first month of the Coalition when the rate of increase in spending fell below 4%. They now need to keep that up, to get somewhere near the promised lower borrowing this year – a mere £122 billion.