Hank Paulson, the former US Treasury Secretary, got down on bended knee to plead with congressional leaders to prop up America’s banking system in 2008. His Democrat successor Tim Geithner is not the type for such flamboyant gestures, but last week there was mounting desperation in the Obama Administration as it urged Europe to summon up the political will to save its single currency.
Only five months before the American presidential election, economic frost is spreading its fingers across the globe. Weak hiring figures in the United States, poor factory data in China and dismal production numbers in Britain were merely three snapshots from what might be turning into a synchronised global economic downturn.
The bickering and dithering in the eurozone are playing key roles.
Lars H. Thunell, chief of the World Bank’s International Finance Corporation, told me last week that the malign influence of the euro crisis was being felt in Africa and Latin America. European banks are curbing the provision of trade finance and cross-border lending as they prepare for further turmoil at home.
Last week’s evidence of accelerating capital flight from Spain raised the stakes dramatically. In Athens a gaggle of feckless politicians are openly toying with euro exit, in the full knowledge that their tiny country could destabilise not only Europe but also the world economy.
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It will not take much, it seems, to persuade increasing numbers of savers in Spain to decide that if Greece is heading for the exit, it would be rational for them to move their euros out of their own country, too.
As we saw with Northern Rock, once bank runs start they have a terrifying momentum. If Spain suffers a full-blown banking collapse, things will move into fast-forward mode. Italy will not be far behind. The euro could begin to unravel quickly, in an event with far more momentous consequences than the Lehman crash of 2008.
At that point, a new Great Depression could be on the cards, according to one former central banker. A full-blown collapse of the euro might well be welcomed by Tory backbenchers as vindication of their well-founded suspicions of European federalists, but it is of little use critiquing a skyscraper’s girders when it is collapsing with you in it.
After more than two years of failed summits, the region’s leaders are well aware that they are entering the last chance saloon. Eurocrats are working towards the European Council summit on June 27-28, pitching it as the decisive moment. In Brussels, plans are afoot to put forward what is being called EMU-Two — a radical reboot of the single currency project.
Critically, this will begin to pave the way to a banking union, one of the glaring pieces of unfinished business that has left the euro so dangerously ill-formed. The elements include a European facility to recapitalise banks, a bank resolution regime, integrated regulation and a Europe-wide deposit guarantee scheme. Notably, this plan is likely to exclude Europe’s financial capital, the City of London, even though it is the home of the region’s bank regulator.
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The trouble is, of course, that a month is a long time in a financial crisis. Before the summit we have the twin hurdles of the Greek and French elections on June 17. The latter is no less significant than the former. If President Hollande is confronted by a badly fractured National Assembly, with the extreme Left and Right heavily represented, it will be even more difficult for him to drive through the economic reforms that France needs so badly.
And Germany is deadly earnest when it says it will not hand over its credit card to France, Italy and the rest without strict curbs on how the money is spent. France is going to have to venture a huge surrender of sovereignty as a precondition to fiscal burden-sharing initiatives such as eurobonds. Selling this to the French public will be an historic feat, even for a committed Europhile such as Mr Hollande.
More imminently, Europe faces the threat of accelerating flight from the periphery banking system. Spain urgently needs to be convinced to accept a European bailout of its banks, given that the cost is too much for Madrid alone to bear. It is a measure of the gravity of the situation that policymakers are talking about capital controls and bank holidays in periphery nations as a way of stemming any full-blown bank runs.
European ministers may have to stand together and make a blanket declaration that they will keep depositors’ money safe, given that a deposit insurance scheme will take a long time to set up. Whether Europe’s citizens would find this convincing is anyone’s guess.
We stand on the brink of a new, 2008-style financial disaster. As Mario Draghi, the European Central Bank president, told the European Parliament last week, it is up to Europe’s politicians to fill the vacuum at the heart of the single currency. With a chill descending on the world economy and the panic in the periphery escalating, the fear is that they have left it too late.