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Euro crisis forces tempo. Human contact softens ideology.

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Paul Mason | 11:44 UK time, Sunday, 9 May 2010

[UPDATE 1245: European Commission finalising proposal right now. Britain's position: no contribution to 60bn stabilisation fund, but not opposed. Opposed to EMF says Treasury. Not clear whether the 600bn proposal equivalent to quantitative easing is in the Commission draft]

As I write, a helicopter is buzzing overhead filming a crowd of journalists on Whitehall. But the real action is going on elsewhere. Europe's 27 finance ministers have been summoned to Brussels to vote on a deal to protect the Eurozone from fragmentation and its weakest economies from fiscal meltdown.

On Friday the EU leaders agreed that a comprehensive bailout was needed by 6pm today, when the Asian markets open.

The bailout needs to do two things:
- Provide a permanent and stable bailout mechanism for those south European economies whose borrowing costs are rocketing and are threatened with default: Greece, Portugal and Spain.
- Provide a mechanism to pump money into the banking system in the case that contagion crosses over, via bad sovereign debts, into the very banks that hold the debts.

It is not clear what the mechanism is or where the money will come from.

On Thursday the ECB ruled out a European version of quantitative easing, whereby the ECB would print money and use it to buy up bad debt. The reason is that overnight the image of the ECB, and the Euro as a currency, would have collapsed from rock solid orthodoxy to tactical, politically-driven status. The Euro, already 5% down on the week versus other currencies, would have been damaged as a global reserve currency.

Now it is being mooted that the European Commission - the de facto government of Europe - raises about E60bn for a "European stabilisation mechanism". Markets were awash on Friday with rumours of an E600bn loan facility to the banks - one year money at 1% - backed by money guaranteed by states.

On top of that, Merkel, Sarkozy and ECB boss Trichet are pushing for the creation of a European Monetary Fund - an EU version of the IMF - where governments commit significant sums to bail out any ailing countries.

Alistair Darling is in Brussels and has consulted with Vince Cable and George Osborne. There's some briefing coming to the Sunday papers about Britain "not committing taxpayers' money". But the short term 60bn facility could be decided on by qualified majority voting; the bigger issue of an EMF would be a 110mph arm ball skimming straight at the cricket box of David Cameron, should he become PM tomorrow. Because the Tories were getting ready to put the brakes on Britain's relationship with Europe.

If the EU leaders get their act together tonight, and launch something meaningful, it will necessarily accelerate the creation of an EU fiscal authority: in plain English, the Eurozone will enforce sound public finance in a way it never did before. But the price will be that, instead of the Gucci lifestyle that came with Euro entry, for southern Europe there will be a decade of recession and slow growth. Germany and France will impose the cost of financial stability on the populations of southern Europe.

For this reason all decisive outcomes are unpalatable. Today German voters are going to the polls along the Rhine and will most likely deliver a negative verdict on the idea of Germany bailing out southern Europe. Meanwhile the negative verdict on the same deal will be passed on the streets of Athens, to the soundtrack of breaking glass and tear gas grenades. European democracy is passing its opinion on the Euro arrangements and it is negative, on both sides of the coin.

When our whey-faced, sleep-deprived politicians say "we need stable government in the national interest", bear in mind that they have all now seen the papers, heard the briefings. I don't know what the outcome of the Brussels meeting will be - nor what the market response will be. But if it spirals in a negative direction over Sunday night/Monday morning it will light a fire under the politicians weighing their options for coalition government.

One other thing: my discussions with the politicians and their hangers-on over the past 36 hours have convinced me minds are changing.

As they speak to each other they are beginning to go beyond the tactical manouvering - which was the main tone on Saturday morning ("How can we do a deal and shaft our main rivals for a decade?"). They are beginning to move towards an understanding that they will have to give up some of their ideological commitments in exchange for power. It is "looking likely" says one source close to the Conservative negotiating team.

Tantalisingly, the "Plan A" of George Osborne - an emergency inquiry into the public finances, the inevitable finding that they are worse than imagined, and a draconian emergency budget with an even bigger scale of fiscal austerity - may have to happen under scrutiny of a LibDem Chief Secretary to the Treasury. Though the numbers may come out just as tough, the option for an "ideological" emergency budget is now gone.

Last night I was convinced most Conservative activists and politicians were minded, for these reasons and others, to go for minority government. Right now, with Alistair Darling just off the plane in Brussels, I am thinking the global situation may reinforce the hand of those in the Conservative negotiating team who want to "do a Disraeli" - accepting a social liberal economic programme and some realistic path that allows the Libdems to get a referendum on PR in return for stable government.

Thus, in the space of 48 hours, we may see the completion of the Conservatives' political transformation - even as the papers supporting the Tory right try to put the whole thing into reverse. Or we may not. That's the nature of a historic crisis.


  • Comment number 1.

    It was dear old Sam Johnson who said that the prospect of a hanging concetrates the mind. At last it would appear that the prospect of hanging together rather than separately is concentrating the minds of the political class.

    We all have our ideological preferences and the more ambitious even have their own agendas but the intelligent will alway tend towards pragmatism. At the moment we do not need ideological purity but something that works.

    I once remarked that Cameron reminded me of the young Disraeli, a bit flash, self-serving, obnoxious to a point but not a bad lad. I went on to suggest that he could mature into a later version of the original One Nation Tory. Are we reaching that moment? Discuss.

    There is no rational argument for a minority government as the task involved is far too big. There is an argument for a coalition government to tackle our financial difficulties whilst at the same time our entire constitutional arrangements are subjected to review. I would suggest that this latter is conducted parallel with the main political issue which is restructuring our economy away from financial services and the government apparat into value-adding manufacture and high quality services.

    Yes, there will be a double-dip recession as it is unavoidable as we cannot keep on funding a state deficit in the region of GBP 150 billion plus a year thereby expanding our national debt to insane proportions which has been Labour policy to date.

    Yes, there is going to be a lot of pain but the public are mature enough to see it and, with appropriate leadership, will find a way through it all. The only people in denial are those who voted Labour for fear of losing their sinecures and doles. Their screams will be deafening at times but even Labour supporters can see that money spent in this way is money wasted.

    The duty of the coming coalition government is to get everyone back to value-added work. This will take time but if it is done fairly and pragmatically then in a few years we will be able to look back at this moment and reflect that the necessary changes started here. Reasons to be hopeful?

  • Comment number 2.

    The European Union leaders MET on Saturday; they were seeking a "stabilization mechanism" that would ease markets supposedly shaken by the Greek economic crisis. EU President Herman Van Rompuy said that the (EU) commission will propose a European stabilization mechanism to preserve financial stability in Europe (This seems somewhat more ambitious than just a plan to ease the Greek crisis.)
    Today, the proposal will be submitted for approval to the EU's Economic and Financial Affairs Council.
    What I liked best was the statement from French President Nicolas Sarkozy who said that EU will combat "without mercy, speculation by regulating financial markets". He added that the EU is absolutely determined to fight speculation by reinforcing financial regulation.
    Apparently the EU has decided (and I truly like this) that either we will let the markets, instead of us, decide the fate of the Euro, or we will take the appropriate measures to combat speculation and to exit this crisis stronger and more unified.
    The decision was to take the combative stance.
    US President Barack Obama on Friday said he spoke with German Chancellor Angela Merkel regarding economic and financial developments in Europe. mong other things, Obama said that the US supports the EU efforts and will continue to cooperate with European authorities and the International Monetary Fund. In fact the EU is rather sceptic about any involvement of the IMF (which the EU sees as too right with the USA) or the US unregulated financial market.
    Spain saw three straight days of losses in its stock market this week after the country's credit rating was downgraded by the influential rating agency Standard & Poor's. I’ve got one question in this regard: Are the ratings agencies credible?
    I mean you look at the American deficit, which is not being downgraded, and you look at Spain’s deficit, and you have to think that the Credit Agencies are symbiotically linked to Wall-Street.
    But things are starting to come to a head. Friday, th Spanish government fired back threatening "legal action" against speculators accused of launching "attacks" against its sovereign debt (aka betting against Spain’s soverign debt). Luis de Guindos, an economist and a former Secretary of State for the economy, said that this is the deepest and most profound crisis Spain has ever had in in five decades; he seemed somewhat at a loss to explain it. Maybe because he cannot believe that one country (the US) would bet so heavily against the sovereinty another country (as well as all the other STUPID PIIGS).
    Incidentally, it may have been the Greek crisis that caused the stock markets to plunge, or it may have been HLT trading, which dominates 70% of the trading market. I like to call this a manipulation vehicle - sticks up, stocks down, depending on what the unregulated American markets need to increase its overall speculation. In fact, you may want to take a look into HLT trading - just for the Hell of it. Goldman-Sachs uses it big time.

  • Comment number 3.

    Shout out to those with an abacus: given that the projected growth forecast of HMG at the budget was about 3.5% + and therefore the structural deficit about £65Bn + what is the likely scale of the REAL figures for spending cuts/tax rises if, as most economists reckon, the growth forecasts are fantasy? if say a realistic growth of 1.5% over 3 years takes place with may be a slip into recession of -0.5% in a quarter or 2 during that period doesn't it make the £65Bn look a little small? What about interest rate rise and removal of QE? What then on tax and spend? VAT rise to 20%. Scenarios please given that GO and VC may be in the treasury together as Paul points out above.

  • Comment number 4.

    "It is not clear what the mechanism is or where the money will come from."

    By six o'clock tonight they are going to save Greece, Portugal and Spain
    and god knows how many others ?

    Errr don't think so some how.

    More printing 'money' ?

    Oh dear me

    Why do I feel that the whole Euro thing will fall apart ?

    Simon Johnson again :-

    "The Europeans will do nothing this week or for the foreseeable future. They have not planned for these events, they never gamed this scenario, and their decision-making structures are incapable of updating quickly enough. The incompetence at the level of top European institutions is profound and complete; do not let anyone fool you otherwise."

    Headless chickens running around spraying bile and blood all over the innocent while the vultures circle over head ready to dive bomb with CDS.

    Drenched in crimson red no one can be distinguished from anyone else - everyone is a steaming stench of vile corrupted bile and blood. Holding bits of financial gobbledygook as if this dreamt up delusion of money power was any kind of answer to life and a reason to being - to value. PhD to the power of 10 on risk but clueless to the basic question of what value is.

  • Comment number 5.

    Not much talk of 'efficiency savings' now. Slash and burn of the public purse but in the short term how does that reduce the deficit especially as the deflationary effects as trikidiki suggests will drive more public expenditure. It will make the right wing journalists feel better that the public sector at long last is going to pay with jobs and reduced benefits but the private sector will also be paying price - halving the state capital programme, reduced disposable income from higher unemployment and inflation.

    Anyway Cameron has got it all wrong. Does he not realise that New Labour is closer to his renewed Tory party than the Lib Dems?

    He needs to talk to Gordon about the next government not ‘upstart’ Clegg!!

  • Comment number 6.

    Surely the scenario the UK has to fear is the Euro nations geting their money printing plan in place? Then the speculators will take a bath and will turn their eye on sterling for a quick, bloody and inexorable payback.

  • Comment number 7.

    The European leaders Hubris is not much different to the investmanr bankers ' Masters of the Universe' did that all end again?

    Aparently they are too big and too clever for the markets to get the better of the euro zone nations and their institutions so obviously there is no need for a sensible structured 'plan b' (phased roll back of the Euro and structured manageable sovereign debt default to spread the pain as reasonably as possible).

    Maybe the Eurozone leaders are afraid that is they looked at a Plan B, most people would assess it and say...hey that sounds like a good plan, what do we need Plan A for?

    Someone remind me..why do we need Plan A?

    Why is keeping the Euro more important than southern Europes peoples right to determin their own financial future while simultaneously puffing out their chests and accepting severe austerity in the name of our great (unelected) European president, Herman Von Rumpoy and our common currency the tapioca of currencies.. the Euro.

    Makes you proud to be a European does it not to know that they are prepared to sacrifice so much for herman and our great European currency.

    Does anyone else see anything wrong with that picture or is it just me?............and the markets.

  • Comment number 8.

    #2 BluesBerry wrote: "Spain saw three straight days of losses in its stock market this week after the country's credit rating was downgraded by the influential rating agency Standard & Poor's. I’ve got one question in this regard: Are the ratings agencies credible?
    I mean you look at the American deficit, which is not being downgraded, and you look at Spain’s deficit, and you have to think that the Credit Agencies are symbiotically linked to Wall-Street".

    Is this surprising to anyone? THEY were the ones that pushed for de-reg of the banks in the 90's...It's their housing market thats sent everything into the toilet...It was their so-amazing-no-one-knows-what-the-hell-they-are financial products created by THEIR wall street professionals that poisoned the global banking system which was an AMERICAN creation in itself. THIS IS WAR BY OTHER MEANS!! and no one appart from the flippin GREEKS seems to care about it...and I am not saying that the bankers of England and our multi-nationals, who incidentaly are now trying to manipulate out election under their collective title 'The Markets' are blamless, far from it! I, the man in the street...the soon to be hopeless; am, it would seem, just a pawn to be discarded at will when 'The Markets' have squeezed that last drop of proffit available from selling fraudeulent financial products!!

    Our whole economic system stinks.


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