“Our financial sector is built on sand,” Michael Lewis, the American author, told me last week. “After all, we’re in the middle of a huge monetary experiment, with central banks playing a bigger role in stimulating growth than we’ve ever seen”.
Back in 2010, Lewis wrote The Big Short – an expose of the banking shenanigans that sparked the 2008 financial crisis. It has since been made into a glitzy Hollywood movie, which enjoyed its UK premier last week.
I didn’t vote in the last UK referendum on Europe. It was in June 1975 – and I was six years old. Some three-quarters of the current electorate, in fact, have never had a say on Britain’s place in Europe. That’s one reason I welcome the upcoming referendum – which could easily be next year and must take place by the end of 2017.
Another Europe vote is needed because the last one, some 40 years ago, is now entirely obsolete. The ballot paper in June 1975 asked: “Do you think the United Kingdom should stay in the European Community (The Common Market)?” Faced with that question, we opted to stay in by a margin of 2-to-1.
Mario Draghi is being hailed, once again, as a rhetorical wizard. The president of the European Central Bank has done it again. After the October meeting of the ECB’s Governing Council, Draghi dropped hints the Frankfurt-based bank would soon be unleashing yet more quantitative easing across the Eurozone, further lowering interest rates, or both.
No matter that the ECB has been churning out €60bn of virtually printed money a month since March and is committed to do so until September 2016. That’s a Euro-QE programme of €1,100bn – an astonishing 8% of the Eurozone’s annual GDP. No matter, also, that the ECB’s benchmark interest rate is 0.05%, with the central bank deposit rate at minus 0.2% – both record lows – or that Draghi has previously said such rates were at “their lower bound”. The ECB is now “vigilant” – a trigger word previously pointing to imminent policy action.
“Launching the single currency marks a turning point for Europe and is crucial to stability, high growth and employment,” declared Tony Blair, then UK Prime Minister, in March 1998. “The euro’s opponents are disheartened as their predictions of chaos and disaster haven’t materialized,” observed former Conservative Chancellor Kenneth Clarke in October 2002, as British euro cheerleaders, many disgracefully opposing a referendum, were still pushing us to join.
“The euro is a protection shield against the crisis,” claimed then EU President Jose Manuel Barosso in February 2010, the Portuguese Maoist-turned-Communist-turned-Brussels-careerist seemingly unaware that sovereign bond yields were already flashing red across the eurozone “periphery”. The likes of Spain, Portugal and Greece were struggling to remain solvent, their national balance sheets already weak from years of over-spending, then crushed by the gargantuan losses of hubristic, politically-powerful banks in the aftermath of the 2008 sub-prime collapse.
Some 10 million Greek voters went to the polls yesterday, in an election with big implications for the future of monetary union. Even if Greece stays in the single currency, after choosing a party determined to defy the European Central Bank, negotiations over bond repayments between Athens and Frankfurt will be extremely hard-fought. The upcoming rhetorical slugfest, whatever the outcome, will have ripple effects across other “peripheral” members of the 19-country currency bloc which could send global bond markets haywire.
This Hellenic election holds big significance for Britain too. Ahead of our general election in May 2015, fears of renewed eurozone turmoil, which this Greek vote could spark, will bolster eurosceptics across all parties. That could lead to an earlier vote on UK European Union membership.
The German government is stuck on the horns of an extremely nasty dilemma. Berlin’s decision will go a long way towards determining whether or not we endure serious instability on global financial markets over the coming months. The future path not just of the eurozone but also the UK and, in fact, the entire world economy will be impacted significantly by Angela Merkel’s next move. The German Chancellor, moreover, has just days to make up her mind.
Is Berlin to permit full-scale quantitative easing? Will Germany’s coalition government allow money created ex nihilo by the European Central Bank to be used to buy the sovereign bonds of otherwise insolvent eurozone nations? While this is an arcane,technical question, the real-world implications are huge.
“Red warning lights are flashing on the dashboard of the global economy,” remarked David Cameron last weekend. The Prime Minister was highlighting, rightly, the plethora of economic and geopolitical risks currently stalking the world, all of which threaten the UK’s fragile recovery.
Referring to a “dangerous backdrop of instability and uncertainty”, Cameron pointed to conflicts in the Middle East and Ukraine, ebola, a slowdown among the big emerging economies of the East and, with a flourish, “a eurozone that’s teetering on the brink of a possible third recession”.
“I wouldn’t hold French shares,” said Nigel Farage with a wink, belying his previous life as a stockbroker. “The country is in real trouble,” the Ukip leader told me at an investment conference in London last week. “As someone who loves France, it gives me no pleasure to say that”.
While Farage casually dishes out advice to sell French stocks, he knows only too well that, for all his admiration of Gallic gastronomy and tabacs, the singular weakness of the French economy, and related political fall-out, is playing into his hands.
“The final word on quantitative easing will have to wait for historians,” wrote Ambrose Evans-Pritchard last week. Now the US Federal Reserve has apparently ended QE, I’d like to take a cue from my esteemed Telegraph colleague by suggesting what future historians might say.
Last Wednesday, the Fed terminated QE3 – the latest incarnation of its money-creation programme. The American version of this highly unorthodox policy began in late 2008, with the Fed creating virtual balances ex nihilo and purchasing assets such as government debt and mortgage-backed securities, often from bombed-out banks.
The US authorities originally billed QE as a $600bn exercise. By unlocking frozen interbank markets, it was supposed to spur growth, breaking the credit crunch. As meaningful recovery remained elusive, though, QE2 was launched in 2010, with its successor two years later.
In sum, the world’s most important central bank has fired $3,700bn from its monetary bazooka. America’s QE has been six times bigger than envisaged. The Fed’s balance sheet has grew more than three-fold in just over half a decade – an unprecedented monetary expansion. And it’s not just America, of course.
QE – IT’S NO JOKE
A Western central banker is ordering a pizza over the telephone.
“Should I cut your pizza cut into six slices or eight slices, sir?” asks the youthful restaurant staffer.
The central banker pauses and scratches his chin. “Hmmm, now let me see,” he says slowly, weighing every word.
“I’m feeling hungry tonight … so cut my pizza into eight slices, please”.
The central banker then pauses again, asks for a moment and then gives his final instruction.
“Actually, I really am quite famished. Could you slice it into ten?”