Italy is back in recession, Spain's unemployment rate is shocking, and even Germany is stallingby Patience Wheatcroft / August 21, 2014 / Leave a comment
The stress tests that are being applied to Europe’s leading banks are, this time, serious. The results of the tests are due in October, European Central Bank (ECB), which takes over supervision of the eurozone banks in November, is particularly keen that any horrors should be out of the way before it takes charge. So this should not be a repeat of the farcical tests that have happened before. In 2010, for instance, Ireland’s two largest banks were given a clean bill of health just months before needing a multi-million pound bailout.
Mervyn King, the former Governor of the Bank of England, recently warned that this time the tests have to be really rigorous: “This is really a last chance for Europe to put in place a credible set of tests on the financial worthiness of banks in Europe,” he said. But the fear is that, if these stress tests do, at last, force the banks to take a realistic view of their positions, then the eurozone is in for another nasty hit.
The wish to believe in the euro, which seems to extend far beyond its 18 member states, has buoyed up the currency despite many negative factors. Yet this summer’s trauma of Portugal’s Banco Espírito Santo—which, in August, was bailed out and split into two separate banks to keep its healthy operations away from its toxic assets—was a glaring reminder of the problems that the eurozone faces. Despite Portugal’s Prime Minister, Pedro Passos Coelho, assuring the country that he had not “the slightest reason to doubt that the tranquillity of our financial and banking system will be maintained,” there has had to be a massive restructuring that has seen billions of euros of public money pumped into keeping part of the bank afloat and many investors effectively wiped out.
This has been a timely warning that the problems of the eurozone have not been eradicated, merely swept under a carpet of wishful thinking. It was always clear that trying to cajole the very different countries of euroland into a single currency straight-jacket would be difficult, but it now looks impossible.
There has been a mass memory loss over the fact that only last year Cyprus ran into financial problems and some people sustained significant financial losses. Perhaps because the majority of those who lost money in the Cyprus collapse were Russian, there was relatively little furore over it, but the message should have been clear: governments no longer stand behind banks.
That should now begin to colour the thinking in the European Union. The overwhelming wish to see “the project” survive has meant that the dire news on EU economies has only been sketchily reported. But the evidence from the eurozone tends toward the negative. Employment numbers remain depressingly low and economic growth, although there are minor signs of hope, is not yet at the level we need to conjure optimism.
Italy, for instance, has just been relegated to recessiondom again. Its attempts at labour market reform seem ineffectual. Spain is looking a little more optimistic, being able to point to GDP growth in the last quarter. But its rate of youth unemployment, a staggering 56.4 per cent, remains a huge blight on the country.
The faultlines that were inherent in the EU are still there today and they are obvious to anyone prepared to look. But the wish to make it work is still strong. Remember that when it was very clear to some that it would be disastrous for the United Kingdom to join the single currency, a majority of leaders of our big businesses were of a very different view. They thought that if we didn’t join the single currency, we would haemorrhage business. They have forgotten that position now but should be reminded of it, as they look at the continuing flow of inward investment into the UK.
The markets have remained relatively sanguine about the single currency, taking comfort from the words of Mario Draghi, the President of the ECB, that the bank would do “whatever it takes” to keep the currency afloat. But will he, or his successors, still say that when what they are faced with is directing large amounts of resources from Germany to her more spendthrift neighbours? As Spain heads back into recession and Greece continues to ponder a national debt that is 150 per cent of GDP, it is clear that their only way of surviving within the eurozone is with Germany’s support.
But now even Germany is finding life rather tougher, with its own growth stalling. And without Germany to bail out the eurozone’s problem children, the landscape would have to change.