‘It’s going to be Lehman on steroids’
In an unusually stark warning, the head of the European Commission said leaders must find a convincing solution to Greece’s debt crisis when they meet today or the global economy will pay a heavy price.
(Daily Mail 21st July 2011)
- Nicolas Sarkozy makes ‘pact’ with Angela Merkel to gain German help
- Crunch talks in Brussels could lead to death of euro if there’s no agreement
- Osborne says crisis could lead Britain into recession as serious as 2008
- British banks have £200bn tied up in weaker economies that risk default
- UK homebuyers face costlier loans due to Greek, Spanish and Italian debt
- Chancellor calls for single eurozone bonds
- Clegg: ‘We are an not island economy. We can’t turn our back on the world’
George Osborne, The UK Chancellor of the Exchequer, urged European leaders to ‘get a grip’ when they meet today in a bid to resolve the debt crisis and warned that if action was not taken, ‘we see the potential for a set of economic events that could be as damaging as 2008‘
German chancellor Angela Merkel and French president Nicolas Sarkozy met and are believed to have made an agreement. One result of their talks announced this morning was a limited DEFAULT on the debt, but where that leads nobody can predict. It’s a very rocky road for all the other EU partners.
And, although Britain does not use the single currency, he said failure to deal with the financial calamity could engulf the UK. David Cameron said Britain faced ‘very bad consequences’ unless decisive action is taken.
Amid mounting fears that the economic recovery could now be reversed unless other countries start to get on top of their massive debts, Mr Cameron warned of a lack of leadership over the issue. That appeared to be a swipe at the French and German leaders ahead of the crunch Brussels summit. Others have echoed this feeling.
To add to the instability, American politicians appear unable to reach agreement on a move to raise government debt limits.
Former Treasury secretary Lawrence Summers warned last night of a ‘financial Armageddon’ and a worse economic crisis than in 2008 if a deal is not struck.
‘It’s going to be Lehman on steroids,’ Mr Summers declared, a reference to the bank that collapsed and triggered the first crisis. Without agreement by August 2, the U.S. government will have to impose immediate spending cuts of about 44 per cent to stave off a default on its huge debts.
CHRISTOPHER BOOKER: The euro now threatens the world with economic meltdown
“No EU leader has ANY practical idea of what can be done to halt this gathering catastrophe.”
While Britain has seemingly been transfixed by ‘Murdoch-gate’, rolling down on us all like a tsunami is a crisis so immeasurably greater that by comparison it makes the misdemeanours of a few journalists, policemen and politicians look quite irrelevant.
Today, as the eurozone’s leaders gather in Brussels to discuss yet another bail-out for Greece — whose borrowings are expected to reach 172 per cent of its GDP soon — they do so against the background of a stark warning from the IMF that Europe’s runaway debt crisis is now threatening a global ‘earthquake’ that could wipe £400 billion off the value of the economies of the world, including our own.
A study by the think-tank Open Europe finds that the European Central Bank alone, in charge of the euro, now faces liabilities of £444 billion — a third of the entire value of Britain’s economy.
As this colossal shadow looms ever larger over our future, two things become clearer by the day. First, no one has any idea of just what mind-boggling sums are now at stake in this crisis.
The second is that no one — not the EU’s leaders, not the world’s bankers, not those in charge of institutions such as the International Monetary Fund or the European Central Bank — has any practical idea of what can be done to halt this gathering catastrophe.
Germany and the Netherlands are fiercely opposed to another massive Greek bail-out — some £400 billion is being demanded this time — arguing that private investors should now be made to weigh in and help. The European Central Bank is, however, utterly opposed to the involvement of private investors.
The likelihood is that the EU’s leaders will again come to some form of hopeless compromise that will temporarily save their faces, but will act only as a sticking plaster.
The truth is the politicians and the money men run around like headless chickens while Europe is on the point of being sucked down into a black hole, the depth of which no one can begin reliably to guess at.
Not a month goes by without further mountains of debt emerging into view — as Spain and Italy join the list of debtors headed by Greece, Ireland and Portugal. Gone are the days when it could be imagined that the richer countries of Europe, led by Germany, could happily afford to bail out the sums run up by the reckless borrowing of their poorer colleagues.
So vast is the problem that it is becoming obvious all the money in Europe couldn’t hope to solve this crisis, which threatens not just the countries of the eurozone, but also many other nations with an economic meltdown without historical precedent.
And all this has ultimately been brought about by the determination of Europe’s politicians to cling on, at almost any cost, to the most reckless single blunder in their 50-year-old dream of building what amounted to a ‘United States of Europe’.
It was way back in the Seventies, as they looked for new ways to ‘integrate’ Europe, when they first came up with the idea that there could be no more dramatic way to symbolise their dream than to unite Europe round a single currency.
This dream was never based on any hard-headed financial calculations. It was always just a political project, a way to weld all the different countries unshakeably together by giving their ‘Europe’ that supreme defining characteristic of a nation state, its own money.
Yet even in those early far-off days there were more practical men who warned that such a breathtakingly ambitious project could only work if ‘Europe’ was given a fully-fledged ‘economic government’, with the power to shift vast quantities of money and other resources from the richer countries to the poorer, in the hope that all their inequalities of income and economic performance could eventually be levelled out.
This was precisely the magisterial advice given by Sir Donald MacDougall, a top Treasury economist, when in 1978 he was commissioned by Roy Jenkins, then President of the European Commission, to produce an official report on the implications of any attempt to create a single currency.
But so intoxicated became Europe’s politicians by their political vision that when, in the Nineties, the foundations for the single currency were laid by men such as Jacques Delors, Helmut Kohl and Francois Mitterrand, all these hard-headed warnings were brushed aside.
And when their beloved euro finally came into being at the end of the 20th century, the script unfolded exactly as the sterner critics had predicted.
Right at its heart, the single currency was based on two crucial flaws. On the one hand, its founders took pride in the fact that all the countries which joined it could borrow money at a single, low interest rate.
This would assist the richer countries, such as Germany, to become even richer, by allowing their industries to expand. But it would also encourage poorer countries, such as Greece, Ireland, Portugal and Spain, to finance their own expansion by borrowing ever more recklessly.
We could be entering the darkest time the world has seen since World War II
Hitherto, when countries faced the crisis that would inevitably follow from such wild overspending, they had two ways to stave off disaster. One was that they could jack up interest rates to halt the crazy overborrowing.
The other was they could allow their currency to devalue, enabling them to recover by selling their goods and services more competitively abroad.
But for all those countries locked into the strait-jacket of the euro, neither of these steps was available to them anymore.
Exactly as predicted, the Greeks, the Irish, Portuguese, the Spaniards and others all borrowed hundreds of billions of cheap euros as if there was no tomorrow — enabling each of them to enjoy runaway economic booms, which were hailed as wonderful examples of how ‘Europe was working’.
But, eventually, as we have seen in the past two years, came the dreadful and entirely predictable nemesis, when those debts piled up to quite unmanageable levels. And what has been the response of those in charge of the euro?
The only thing they could not contemplate was that they should admit their great experiment had failed, and that they should allow all these bankrupt countries to drop out of the project which had brought about their downfall and find their own answer to their problems by regaining the power to control their own currencies.
Instead, they have resorted to the final desperate measure of attempting to bail out the countries in crisis by chucking at them ever more astronomic sums of money, which the hapless recipients have little or no prospect of ever being able to pay back.
And before we console ourselves that at least Britain has managed to stay out of this catastrophic experiment, let us remind ourselves just how horribly we, too, have become entangled in this disaster.
Last week, our MPs were asked to vote, without a debate, to double our lending to the IMF to £20 billion.
This is just one of the many ways in which we and our own economy are now being drawn into the same bottomless pit of international lending, supposedly to rescue those countries already facing bankruptcy by handing over to them astronomic sums of money which they can almost certainly never repay.
The IMF warns that this crisis will set off an earthquake that could not only wipe hundreds of billions of pounds off the global economy, but which could well do it such damage as to make the banking crisis of 2008 look like a mere hiccup.
We could be entering the darkest time the world has seen since World War II. And the terrifying fact is that, as yet, not one of Europe’s supposed leaders has the slightest idea what to do about it.
How much easier it is to indulge on sanctimonious hysteria over the misdeeds of an octogenarian media tycoon.
Read more: European Debt Crisis