The markets have been bowled over by the scale of the eurozone bail-out package announced this morning, after agreement by G-7 finance ministers, the European Commission, the 16 eurozone governments and the International Monetary Fund. An emergency funding facility of up to €720 billion is designed to protect weaker eurozone members and save the integrity of the euro. At last the swathe of platitudes, reassurances and empty promises which have characterised the year to date has been replaced by concerted action.
The package is a dramatic reminder of the inter-relationships between global economies. Last week we seemed on the brink of a new Lehman-style banking crisis, this time created in the land of the euro but spreading across the world. Inter-bank lending threatened to dry up at the prospect of Greece defaulting, with banks across Europe and beyond hit by the consequent loss of confidence – especially those with substantial holdings of Greek bonds.
The ECB, the IMF, the US Federal Reserve and other central banks are all implicated in the measures to improve liquidity.
The IMF has now become a full partner in the support mechanisms for the eurozone – not a partner much welcomed by those purists who wanted to keep eurozone troubles within the family, but a better agent for enforcing disciplines than the European Commission or the Council of Ministers could ever be. The Fund will provide up to €220 billion of the new facility – one-third of the total, as in the deal to support Greece.
The fact that a possible contender for the French presidency now heads the IMF adds an extra frisson of interest. Dominique Strauss-Kahn and Nicolas Sarkozy are not seen as the best of friends.
For Chancellor Merkel it was a particularly tough weekend. She had hoped to delay any commitments at least until after the elections in North Rhine Westphalia, but the scale and urgency of the crisis and the impact of a Greek default on many German banks made immediate action vital. NRW took its revenge, voting out the CDU – FDP coalition.
As usual it’s the “speculators” who are fingered as the guilty parties for driving down the euro and threatening contagion for Spain, Portugal and others. It’s an easy cop-out to shift the blame for political and economic failure to the malign forces of what former British prime minister Harold Wilson called “the gnomes of Zurich” when the pound was forced to devalue in the 1960s. ‘Twas ever thus.
The waves from the eurozone storm hit Britain’s shores with some force. It was not the prospect of a hung parliament which drove down the London stock market last week, but fears that the Greek crisis would shatter the UK’s recovery prospects. As soon as the stability package was announced this morning, London share prices shot up by three per cent.
The prospect of a coalition government for Britain grows by the hour. It would be the first real coalition since Churchill’s wartime government was dissolved in 1945, but a likely outcome given the Conservatives’ failure to win an outright majority. The Conservatives took 306 seats in Parliament, 20 short of a clear majority, with Labour at 258 and the Liberals at 57.
On May 8 the Conservatives’ David Cameron formally invited the Liberal Democrats to join him in government. It may prove to be a watershed of historic proportions. That is if the Lib Dems dare to take the plunge and if there is enough flexibility on the Conservative side. Talks between Cameron and the Lib Dems’ Nick Clegg have been under way all weekend. Early indications are that agreement would concentrate on measures to tackle the massive UK budget deficit, but would include enough common policies to create a coalition fit for at least two years of stable government. The future of the voting system may be the most intractable issue.
For Nick Clegg, leader of the Lib Dems, the outcome of the British general election was the stuff of dreams, even if it began with disappointment at losing parliamentary seats when all the opinion polls suggested a surge in support. At least Clegg can take the credit for changing the game, for stimulating interest and boosting turnout. The cynicism which many of us thought would sour the elections and cut participation was swept away in a much more positive electoral picture.
Britain’s EU policy seems unlikely to be a major problem in formation of a Conservative – Lib Dem coalition. Although the rhetoric on Europe is different the practical obstacles seem to me to be minimal. Certainly Clegg could not hope to take the foreign affairs job in a coalition government, but no major EU decisions are imminent to upset any partnership. The failure of the UK Independence Party to secure more than 4 per cent of the national vote has probably justified Cameron’s euro-sceptic tone. It may well have seen off europhobia as a major force in British politics.
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July 13, 2023