Friday, 22 July 2011

How are we doing at avoiding catastrophe?


So at the start of the week things looked pretty grim for the world economy. The Americans were heading towards a debt default that would shake confidence at the heart of the international financial system. The Europeans were sleepwalking towards the breakup of their shared currency, the Euro.

We've had a week of frenetic discussions. So how were politicians and officials doing by the end of the week? Are we any nearer seeing the light at the end of the tunnel?

Well, it's all still a work in progress. It's all just far, far too slow. But there are chinks of light.

Politicians continue to jaw-jaw in Washington, and there might just be a sense that war-war on a nuclear scale is off the table. But I wouldn't count on it. And any deal will be a tiny mouse copmpared to the 'grand bargain' between Democratic tax rises and Republican cuts that the USA really needs. As The Economist's Lexington column put it last week: despite the idea that compromise is inevitable, 'this is a season of dangerous brinkmanship in America. Compromise may still be possible, but there is nothing inevitable about it'. A week on, that's still the place we're in. It's profoundly depressing, but the gridlock of the United States' federal institutions does seem to be a fixed point in a gloomy economic outlook. We'll see. There are just seven business days now left to D-day: default day. No deal? No jobs.

Turning to the European Union, there's a bit more optimism at the end of the week now that Greece is to be allowed a 'soft default' - that is, to stop paying the utterly ludicrous levels of debt repayment and interest that the country's voters had been locked into. You read it here first, folks. About twenty per cent of her debts have been wiped out. Private banks, who are having their backsides covered by European taxpayers yet again, are going to contribute. There's going to be a new Stability Facility to help in future. Stock markets have risen; bond rates have fallen. Angela Merkel and Nicholas Sarkozy, that odd couple of European politics (above), have managed to keep the show on the road one more time. But that's all they've done. Greek debts have only gone back to the implausibly-sustainable levels of the spring. The banks are only sharing a little bit of the pain - rather than being made to realise that their irresponsibility is at the heart of our present crisis. The new Stability Facility will not be enough if a really big country threatens to go down.

The structural problems have not gone away. Republicans and Democrats are in their trenches, watching conservative Fox or liberal MSNBC, lionising 'enterprise' or 'public service', idolising Reagan or Roosevelt. Only the Senate has kept its head at all, and that only barely. Across the Atlantic, the difficulties remain: constraining banks across a wide geographical area, with only 'converged' rules and nation-states, and a relatively weak European Central Bank, to guide them. Persuading German, French and Swedish taxpayers to stump up for 'improvident' southerners (even though their own banks are on the line, too). Trying to formulate a way of issuing debt for the whole of Europe, rather than letting vulnerable states blast a great big hole in the Euro's credibility, without just announcing a federal state called 'Europe' on a quiet Friday in July.

The question posed at the top of this post was: how are we doing at avoiding catastrophe?

Answer: we might just manage it. But only 'might'. And only for now.

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