Hamish McRae: Euro crisis: three (major)
new developments to worry about

Our Chief Economics Commentator argues that the sunlit uplands of robust growth are as far away as ever


On it grinds. The seemingly endless rounds of emergency meetings, confident assertions by politicians, dire predictions by economists, calls for support by bank chiefs – the histrionics of the euro crisis – have been in full cry over the past few days. Indeed, there has been so much drama that it is hard to distinguish what is really new and different and what is a rehash of what was known already. But there do seem to be at least three significant new elements.

The first is that there has been a sharp loss of confidence in southern European banks, with a flood of money being taken out of Spanish banks in particular. The weak response of the Spanish government to this crisis, first by downplaying it and now seeking European funds for the banks, has made matters worse.

As a result, the European Central Bank will probably have to pump more liquidity into the banking system. It may announce that this week, together perhaps with a cut in eurozone interest rates. That will not, however, do more than buy a little time, because the problem of many European banks is not liquidity but solvency. They need more capital.

That leads to the second new element. There will be some kind of central financing to support European banks, many of which need more capital. This will have to go along with centralised supervision, because you can't commit the taxpayers of one country to bail out the banks of another without some sort of control over what those banks do with the cash. Quite how this will be done is very hazy and the funds available may be inadequate, but views on this have moved in the past few days.

And third, the whole idea that European countries, or rather eurozone countries, will have to follow strict fiscal rules has also moved forward. Now, many people feel that a Europe where Germans tell Italians or Spaniards how much they can spend, and the Italians and Spaniards actually agree, is out of the question. But at least the issue has become clearer than it was even a couple of weeks ago. Suddenly and belatedly, European political leaders are coming to appreciate the scale of the task ahead.

And that is about it. There are other small things happening: there will be some sort of "growth agenda" agreed at the next EU summit, but this will be tiny. There will be a deal of hand-wringing at the forthcoming G20 meeting. If the world economy seems about to take another lurch downwards – and while the data coming through in the past few days has not been all bad, there is a clear danger of that – then the G20 leaders may go beyond hand-wringing and produce more substantial measures to try to boost growth. But there is a huge problem, reflected in the recent falls in share prices just about everywhere and the fall in the bond yields in those countries perceived to be "safe havens", including, somewhat surprisingly, the UK.

The problem is that several things have come together to undermine the confidence of the business community worldwide. Of course, there is the future of the eurozone, but that is only one issue. Another is US fiscal policy, for under present legislation a set of tax cuts in the US will be reversed, leading to a sharp tightening of fiscal policy. Still another is the evident slowdown in China. The only silver lining to these clouds has been the prospect of lower energy prices, with the oil price already falling back to below $100 a barrel and the general perception in the market being that some further decline is likely. That will help consumers everywhere, including, of course, in the UK.

But the sunlit uplands of faster growth that seemed to be in sight a few months ago have disappeared again. The world economy, as a whole, is still growing. But Europe is not, and the business community at least recognises that part of the blame for that lies in the rigidities created by the single currency.

UK takes a working holiday

It may have been a great party, but we have to get back to work some time. But did we ever stop working?

Conventional economics assumes that output falls on a bank holiday. The Queen's coronation was delayed by more than a year because Winston Churchill felt that the country could not afford the loss. But is that still the case?

If you shut a factory because of an extra holiday, you lose the output of that day. In 1952, manufacturing was some 30 per cent of output, so the loss would indeed have been notable. But now manufacturing is a much smaller proportion of output, and much of the service industries are 24-hour-a-day, seven-days-a-week operations. Shops did not shut, fuel stations stayed open, airports probably saw more passengers, not fewer.

Further, many factories run seven-day-a-week operations, too. Add to this the fact that the Jubilee created some jobs that were not there before, and it is plausible that there was no loss of output at all.


React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Massage Therapist / Sports Therapist / Physio / Osteopath

£12000 - £24000 per annum: Recruitment Genius: An opportunity has arisen for o...

Recruitment Genius: Account Manager / Sales Executive - Contract Hire

£35000 - £60000 per annum: Recruitment Genius: This industry leader provides c...

Recruitment Genius: Project Coordinator

£28000 - £30000 per annum: Recruitment Genius: A Project Coordinator is requir...

Recruitment Genius: Area Sales Manager - Midlands

£20000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Read Next

Don’t pity me for eating alone, just give me a better table

Rosie Millard
Aerial view of planned third runway at Heathrow  

Heathrow expansion: This final 'conclusion' has simply fanned the airport flames

Chris Blackhurst
John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most