Eurozone nations are stuck in a ‘doom loop’
The euro was a very bad idea yet fiscal union is far worse and will fail, but not before it spreads bitterness across Europe.
By Liam Halligan
23 Jun 2012
‘These global economic problems have their roots in the fools’ paradise we all used to live in,” observed Lord Peter Mandelson on Friday, to a packed seminar at the St Petersburg International Economic Forum.
“Pretty much everyone borrowed and spent beyond their means and that’s now catching up with us,” continued the former Cabinet Minister. “And it’s the inter-twining of the sovereign debt and banking crises that makes any eurozone resolution extremely difficult.”
On this point, Lord Mandelson is correct. Years of extreme lending and reckless trading by Western banks brought serious sector weakness. The disgracefully cosy relationship between our political and financial classes and the even more disgraceful use of banking blackmail, has meant, in Lord Mandelson’s words, that massive banks losses “have, in one way or another, landed on sovereign balance sheets”.
Such is the reality that plagues the eurozone, with toxic bank liabilities raising deep concerns about sovereign insolvency and the resulting sky-high bond yields destroying commercial sentiment and throttling growth, making dodgy banks weaker still. This bank-sovereign-bank “doom loop” has brought Western Europe back to the brink of recession, with related systemic fears casting a very dark shadow over the entire global economy.
If only Angela Merkel would agree a big bail-out, we’re told, everything will be fine. The German Chancellor retorts that the only way Berlin could possibly agree to back-stop debts of more profligate eurozone members would be if Germany has more control over the spending of other governments.