The sense of optimism in the markets derives partly from the contrast with the dire mood just before Christmas. At that point, many thought the New Year would usher in Armageddon. Yet we have been back at work for more than two months and still the roof hasn't fallen in. So that's all right then.
In truth, there were always more stages to go through before the crisis got to boiling point. Greece was likely to receive a second bailout. My doubts were based primarily on the unreality of the economic forecasts behind such a package, and the conviction that there would, before long, have to be a third bailout.
At that point, I reasoned, the patience of other eurozone members would be wearing thin, as would the patience of the Greek government and electorate. But we are not there yet.
Meanwhile, another important factor is still developing. If Greece defaults and leaves the euro, it would presumably lose all access to bailout funds. At least initially, the markets would then shun the country. If it was running a primary deficit, i.e. even ignoring interest payments, and government expenditure exceeded revenue, a euro exit would bring forced cuts in public spending. In an extreme scenario, pensions and public sector wages may go unpaid. Accordingly, the best time for Greece to consider a euro exit has always been when its primary expenditure was back in line with revenue.
In fact, this requirement is not absolute, for once out of the euro, it could instruct the Bank of Greece to buy government debt. Nevertheless, to retain confidence, its resort to central bank finance would need to be limited in time and extent. I think the government won't be back to primary balance until the second half of next year. But it should be within striking distance later this year.
Meanwhile, the provision of practically unlimited central bank funding at 1pc has prevented what could have been a devastating liquidity crisis. Many eurozone banks cannot get funding from the markets on almost any terms. If their plight had gone unrelieved, they would either have had to sell assets or call in lending. Many of them might have gone bust. In preventing this, Mario Draghi, the ECB President, has proved pragmatic and imaginative. Whether he deserves his nickname of Super-Mario, though, is another matter. He should pinch himself: at one point, Alan Greenspan could supposedly do no wrong.
Preventing a crisis is not the same thing as stimulating a recovery. That would require banks to use access to cheap ECB funding to boost lending, or, at the very least, to buy assets. Yet why should they lend more? Experience in Japan, the US and the UK, shows you can provide liquidity until you are blue in the face but, if the economic conditions are not right, banks will not increase lending.
Nevertheless, eurozone banks have apparently increased their holdings of government debt. To that extent, the ECB funding programme amounts to quantitative easing (QE) by the back door.
But again, the international evidence is that the effectiveness of QE is limited.
At least straightforward QE lands the central bank and thereby ultimately the taxpayer with the risk implied by huge holdings of government debt. But not in Super-Mario's solution. It is a funny answer to a problem which includes weak banks to load them up with yet more potentially disastrous assets.
Meanwhile, in the background, other euro crisis features have been bubbling away. Greece is due to have an election which could produce an awkward result; in France, Nicolas Sarkozy looks likely to lose the Presidential election to Francois Hollande, who has pledged to renegotiate the terms of the fiscal pact; Ireland has announced that it will conduct a referendum on it; Ireland and Portugal have sought an easing of the terms of their own euro bailouts; and there has been growing disquiet in Germany about the very things that have enabled Draghi to defuse the crisis.
In any case, Super-Mario's solution, as with every other supposed solution so far, is about finance, not about adjustment.
We have been here before, under the Bretton Woods fixed exchange rate system, agreed in 1944. Throughout the 1960s, it was plainly tottering. In the end, inexorable economic logic won out and the system broke down in 1971.
This is going to happen with the euro. But although you can see the stage props being manoeuvred into position, we are not yet at the final scene.
The Telegraph
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