The Eurozone economy has contracted every single quarter since the end of 2011. During the first three months of 2013, the region’s GDP shrank by a punishing 0.6pc, having fallen at a similar pace the quarter before.
Responding to this prolonged slump, the European Central Bank on Thursday cut interest rates. Having last shifted 10 months ago, the ECB lowered its main rate by a quarter point to 0.5pc, while signalling it is prepared to go even further. “We remain ready to act if needed,” said ECB President Mario Draghi.
“It was Europe that toppled her”. That’s the conventional wisdom, repeated endlessly in recent days, on the subject of how Margaret Thatcher lost her grip on power.
It’s perfectly true, of course, as the record shows, that back in November 1990, many of the then Prime Minister’s own MPs voted to oust her from No.10, embarrassed as they were by her high-handed treatment of Britain’s “European partners”. For them, Michael Heseltine’s “consensual” approach seemed wiser and less troublesome. To tolerate and indulge Brussels’ vision of “ever greater union”, as numerous Tory bien pensants insisted, was to be somehow less chauvinistic.
Recession grips the eurozone. The economy of the 17-nation bloc contracted by 0.6pc over the fourth quarter of 2012, we learnt last week, a much worse result than expected and the third consecutive quarter of real GDP decline.
The worst performers were the Portuguese, Italian and Spanish economies, which shrunk by 1.8pc, 0.9pc and 0.7pc respectively compared to the previous three months. But “core” members also dragged on the currency union’s performance, with national income falling in France, Austria and the Netherlands too. Even Germany stumbled, the region’s economic powerhouse losing a shocking 0.6pc of GDP between October and December.
So that’s it, then. The veil has slipped. The only surprising aspect of the French sovereign debt downgrade is that it took so long. The eurozone’s second-largest economy has lost its AAA rating. Eight other single currency members were also downgraded. Given that Paris is bank-rolling no less than a fifth of the purported “big bazooka” bail-out fund – the so-called European Financial Stability Facility – monetary union is now on very thin ice.
That’s because, in the wake of S&P’s exocet, the EFSF also could be downgraded. So the fund, too would pay more to borrow, just as credit becomes more expensive for the newly-downgraded countries it might need to bail-out. The likelihood the EFSF can do its job will fall, then, as the chances it will be needed rise. The question of whether the fund can “lever-up” from its existing €440bn (public money pledged, not delivered) to the €1,000bn-plus that may be needed if Europe’s banks endure “another Lehman”, is now under serious scrutiny.
With Ben Bernanke’s deeply inconclusive Jackson Hole missive now behind us, all eyes are firmly fixed on European Central Bank President Mario Draghi. Back in early August, Draghi publicly pledged to do “whatever it takes” to prevent the break-up of the single currency.
This statement, which a vacationing Angela Merkel didn’t contradict, was taken as a sign that the ECB would soon be buying large quantities of government bonds issued by essentially bankrupt eurozone nations. As such, Spanish and Italian yields stopped rising and global markets remained calm during the dog-days of summer – moving mainly sideways, albeit on very low volumes.
On Thursday, the Spanish government’s borrowing costs came within a whisker of their euro-era high. Madrid’s 10-year bond yield jumped back above 7pc in a poorly-covered €3bn auction.
Trying to minimize its immediate financing costs, Spain has recently skewed its debt sales towards short-term instruments. Ominously, though, yields are soaring even on 2-year debt. Sovereign bonds for 2014 repayment were last week sold only at a huge 5.204pc yield, with Madrid now paying a fifth more for short-term money than it was six weeks ago. Even at these sky-high rates, the 2-year auction was also poorly-covered.
This euro crisis is now getting extremely serious. Events are happening quickly, closing-in on policy makers and threatening to engulf us. Across the single currency zone, fears are rising and, even in the most moderate nations, populations are becoming more restive. History is locked on fast-forward. Some say that seemingly arcane economic policy debate doesn’t matter. In the UK, in particular, but across much of the rest of Western Europe too, the political and media classes have long displayed a tendency to roll their eyes whenever anybody with even a smattering of economic insight has had the audacity to show it.
For the bien pensants, ignorance of financial issues has been a badge of honor. Economics has been dismissed as a “trade”. To hold well-researched views about commerce and asset markets has been to be a suspect arriviste “striver”. Such is the prejudice of those cosseted from economic reality, their minds dulled by generations of inherited wealth. Well, such minds created the euro and what a disaster the euro has been. And the greatest disaster could yet be to come.
“Today the problem is solved,” declared French President Nicolas Sarkozy just five weeks ago. “How happy I am a solution to the Greek crisis, which has weighed on the economic and financial situation in Europe and the world for months, has been found”.
Just when you hoped it really was “solved”, the “eurozone crisis” has roared back onto the global agenda. Like a dripping tap, a lingering bad smell, the fundamental contradictions at the heart of monetary union can be blanked-out for a while but refuse to go away. The busted banks, the grotesque indebtedness, the inherent contradictions – in recent days they’ve all burst back into view.
A couple of weeks ago, I sat on the speakers’ podium during the opening panel of the Euromoney Bond Investors’ Congress in London. Together with leading industry experts, including senior ratings agencies officials, we engaged in a detailed discussion of the contentious aspects of the Greek debt debacle and the fate of the eurozone.
The audience was “top drawer”, the room packed with 500 of the world’s biggest bond market participants, the combined assets under management measured in the trillions of dollars. “Who thinks the upcoming Greek bail-out will be the last, drawing a line under the eurozone’s sovereign debt crisis?” asked the senior Euromoney staffer chairing the panel. “Put your hands up”.
Since last weekend’s eurozone “grand summit”, the headlines have been positive and, in the official photos anyway, the main players appear to be smiling. As such, the global equity rally goes on. Behind the rictus grins, though, the gloves remain off, the rhetorical daggers still drawn. Having launched the biggest sovereign debt restructuring in history, Athens now faces the Herculean task of persuading holders of Greek bonds to accept a “voluntary” hair-cut.
Creditors are being asked to swap their bonds for a combination of new short-term instruments, issued by the European Financial Stability Facility, and longer-term Greek government debt. If half of them agree to take the hit then, under “collective action clauses” approved by the Greek Parliament, the deal could be forced on all bond-holders.