The euro has essentially broken down as a viable economic and political undertaking. The latest rush of events reeks of impending denouement.
8:00PM BST 03 Jun 2012
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Switzerland is threatening capital controls to repel bank flight from Euroland. The Swiss two-year note has fallen to -0.32pc, not that it seems to make any difference.
Denmark’s central bank said it was battening down the hatches for a "splintering" of EMU. It has cut interest rates twice in a matter or days and pledged to do whatever it takes to stop euros flooding into the country. Contingency plans are on the lips of officials in every capital in Europe, and beyond.
On a single day, the European Commission said monetary union was in danger of "disintegration" and the European Central Bank said it was "unsustainable" as constructed. Their plaintive cries may have fallen on deaf ears in Berlin, but they were heard all too clearly by investors across the world.
Joschka Fischer, Germany’s former vice-Chancellor, said EU leaders have two weeks left to save the project.
"Europe continues to try to quench the fire with gasoline – German-enforced austerity. In a mere three years, the eurozone’s financial crisis has become an existential crisis for Europe."
"Let’s not delude ourselves: If the euro falls apart, so will the European Union, triggering a global economic crisis on a scale that most people alive today have never experienced," he said.
Mr Fischer has the matter backwards. The euro itself is the chief cause of the existential crisis he discerns. Yet he is right that three precious year have been squandered, and that Europe‘s policy mix has been atrociously misguided. The pace of fiscal tightening has been too extreme, made much worse by the ECB’s monetary tightening last year. This inflicted a double-barrelled shock on Southern Europe. The whole region was forced back into slump before it had reached "escape velocity".
The window of opportunity offered by US recovery is slamming shut again. America’s dire jobs data for May - and the downward revision for April - confirm the fears of cycle specialists that the US economy has slipped below stall speed. America risks tanking back into recession as the "fiscal cliff" approaches late this year, unless the Fed comes to the rescue again soon.
Brazil wilted in the first quarter. India grew at the slowest pace in nine years. China’s HSBC manufacturing index fell further into contraction in May, with new orders dropping sharply and inventories rising.
We face the grim possibility that all key engines of the global system will sputter together, this time with interest rates already near zero in the West and average public debt in the OECD club already at a record 106pc of GDP.
"The world’s largest emerging economies are no longer in a position to carry the global economy through tough times, as they did during the 'recovery' years of 2009-2011," said China expert Andy Xie.
The warnings from the bond markets could hardly be clearer. German 10-year Bund yields closed at 1.17pc. The two-year notes turned negative. British Gilts closed at 1.53pc, the lowest in 300 years. US Treasuries fell to 1.45pc, lower than at any time during the Great Depression.
The debt markets are pricing in for a global deflationary bust. Europe will have to restore shattered trust in the worst possible circumstances.
If deposit flight from Spain was €66bn in March before the Greek election tore away the pretence that Europe had solved anything, one dreads to think what it will be in April and May when the data come out.
Alberto Gallo from RBS says Spain will need an EU rescue package of €370bn to €450bn to bail out its crippled property lenders and limp through to 2014, pushing public debt to 110pc of GDP.
This would be the biggest loan package in history by a huge margin. Whether the EU bail-out fund could raise the money on the global markets at viable cost is an open question.
Spanish premier Mariano Rajoy vowed in any case last week that there would no such rescue. It is not a vow he can break quickly or easily, whatever dissidents in his party may want.
Mr Rajoy is gambling that Germany will blink first, letting the ECB intervene in the bond markets to cap Spanish yields.
Europe’s officials seem to think Spain can be pushed into a bail-out - as Ireland and Portugal were pushed - but it is far from clear that Mr Rajoy will accept the long agony of debt-deflation, or take lessons from Brussels.
Heretical thoughts are gaining traction. El Confidencial suggested that Spain should engage in "blackmail" against the EU ("chantaje" in Spanish). "Rajoy has a card up his sleeve: leaving the euro. It is not the best option, and fundamentally it is not what most people want. But the time has come to make Brussels a poisonous proposal: "we have already done everything we possibly can, and if you won’t help us, we will leave," it said.
Mr Rajoy has not yet reached such a desperate point, yet his language over the weekend has an ambiguous feel. "We must ensure that the euro remains the currency of our countries," he told Catalan business leaders.
A group of leading professors wrote a joint appeal in Expansion, exhorting the Spanish nation to muffle their ears and resist the "siren song" of those arguing - and gaining ground - that liberation lies at hand with an "Argentine" dash for the peseta and economic sovereignty. It has come to this.
Italy is scarcely more predictable. Ex-premier Silvio Berlusconi offered us his cunningly pitched "mad idea" on Friday. If the ECB refuses to act as a lender of last resort, Italy should take matters into its own hands. "We should use our own mint to print euros," he said. It is a thinly veiled threat.
"People are in shock. Confidence has collapsed. We have never had such a dark future," he said. Indeed, the jobless rate for youth has jumped from 27pc to 35pc in a year. Terrorism has returned. Anarchists knee-capped the head of Ansaldo Nucleare last month. Italy’s tax office chief was nearly blinded by a letter bomb.
"If Europe refuses to listen to our demands, we should say 'bye, bye’ and leave the euro. Or tell the Germans to leave the euro if they are not happy," he said.
Mr Berlusconi is no longer prime minister. But he still controls the biggest bloc of seats in the Italian parliament and can bring the technocrat government of Mario Monti to its knees at any time.
His point is entirely valid in any case. The ECB’s failure to ensure financial stability - the primary task of any central bank - is shockingly irresponsible. It is this that has driven his country into a liquidity crisis. What did Italy do wrong to justify a surge in bond spreads to a record 464 basis points last week? It is close to primary budget surplus, and has been for five years.
Germany can break the logjam at any time by agreeing to fiscal union, debt-pooling and full mobilization of the ECB, with all that this implies for its democracy. The answer from Chancellor Angela Merkel over the weekend was "under no circumstances". In that case, prepare for the consequences.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9309669/The-week-that-Europe-stopped-pretending.html
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9309669/The-week-that-Europe-stopped-pretending.html