Alarming blips on the Euro radar screen
My credit crunch radar is bleeping with all kinds of worrying dots and they're mainly concentrated on the edges of Europe. There is Greece, its land borders currently blockaded by protesting farmers; there is Iceland, where protests last week brought down the government (for a valedictory interview with deposed prime minister Geir Haarde, click here); and now France, where a public sector strike has brought 300,000 people onto the streets of Marseille alone, and they're calling today Black Thursday.
If we dig into what's happening there are many layers. First, there is the austerity measures being introduced by governments. The ostensible cause of today's strike in France is pre-planned reforms to the school system and job cuts among teachers; but it's brought students to occupy their colleges, car workers, rail workers - and its fanned by a generalized discontent about the way Sarkozy is handling the credit crunch.
The second layer of problems Europe faces concerns the East European banking system. Though most of the stricken countries are outside the Eurozone, there are some big Eurozone country banks exposed to the near collapse of east European banking - above all in Austria. A coalition of banks led by Austria's Raiffeisen and the Italian giant Unicredit has said they may have to stop lending both to governments and companies in the Balkans. They are pleading with the EU for financial support. In the Baltic States and the Balkans the banking system is dominated by subsidiaries of these Eurozone owned banks. What analysts fear as a worst case scenario (why am I using this phrase a lot right now?) is that a banking collapse in the east pulls the Austrian banking system down with it.
The third tier of crisis concerns the Euro. The EU's commissioner for economic and monetary affairs has said today that the Eurozone "will not break apart" because of the stresses on its weakest currencies. But the question is being asked.
The reason is the growing "spread" between the interest rates governments have to pay to borrow on the international markets. Theoretically, beause they're all part of the Eurozone, they should have the same interest rates. But it's always been slightly divergent and now massive gaps have opened up.
Greece had its credit rating downgraded on 14 January; Spain lost its AAA rating last week. Portugal has also had its rating cut. As a result these countries have to pay significantly more interest on their sovereign debt compared to the baseline country, Germany. Ireland is in the same boat. What this means is that, although there's a single currency, there is a differential risk of a sovereign debt default, a different interest rate for government borrowing and so, in the fullest sense, there is not really a single currency.
It's prompted my colleagues to ask me (why me?) why the Brits are not revolting in concert with their European counterparts. I will give you three reasons:
1) There's no austerity drive yet because the government has decided to borrow its way past the next election. The austerity will come later.
2) The fall of sterling against the Euro allows Britain not only to export more but to let steam out of the system that the pegged Euro countries cannot.
3) They are protesting, but mainly about Gaza (also Heathrow and, sign of the times, migrant labour in East Anglia). This is relevant because the Greek protests, as is widely acknowledged, started over a killing by the police, and have now rolled over into agricultural subsidies and the general handling of the crisis.