“The euro will survive. It is not questioned.” So said European Central Bank (ECB) council member Erkki Liikanen last week. Well, it’s being questioned now. The euro crisis has moved way beyond investors fretting about whether Portugal or Spain will go bust next. The existence of the single currency itself is at stake.
As Dylan Grice of Société Générale observes, you can easily judge how far along we are in a crisis, simply by looking at which stage of denial policy-makers are working their way through. At first, they’ll deny there’s a problem at all – take Federal Reserve chief Ben Bernanke’s assertion that there was no US housing bubble. When that fails, they’ll deny that it’s a big problem – sub-prime was going to be “contained”. Finally, when it’s clear that there is indeed a big problem, they’ll pass the buck – as the attempts by governments to scapegoat short-sellers and ‘speculators’ for the financial crisis show.
Now it’s the turn of the eurozone. The ECB president, Jean-Claude Trichet, warned this week that investors tend to “underestimate the determination of governments” to hold the euro together. I’m sure they do. A break-up of the eurozone would result in huge loss of face for those who had invested so much political capital in the project, not to mention the financial chaos that would ensue.
But the cost of staying together is also too high. Not even Germany (for all that it seems to be recovering well – see page 10) is a bottomless money pit. Even German bund yields have began to creep up in recent days, as investors fear that the bail-out bill will be too great. Indeed, the only way that Europe can stand behind its implicit promise to bail out every single wobbly eurozone economy is to follow the path of the US and the UK, and print a load of extra euros to buy troubled governments’ debt. But how will inflation-phobic German voters react to that?
If it’s any consolation to European officials, they’re not the only ones in denial. The People’s Daily (“China’s official mouthpiece”, as Caixin Online puts it) has been blaming an unnamed investment bank for the steep dive in Chinese share prices in the middle of last month, rather than fears over how China will deal with its growing inflation problem.
According to the People’s Daily, “China’s fight against inflation will not come at the expense of a stockmarket collapse. The market should not overreact to the measures by the government to curb inflation.” When governments start telling markets that they “just don’t get it”, you can be sure we’re on the verge of something messy. A crash in China could make the eurozone’s woes look manageable by comparison. Whether that thought will comfort Trichet and his colleagues is another matter.
• Merryn Somerset Webb is away.