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

Share

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.

h.mcrae@independent.co.uk

React Now

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

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

Commercial Litigation Associate

Highly Attractive Package: Austen Lloyd: CITY - COMMERCIAL LITIGATION - GLOBAL...

Systems Manager - Dynamics AX

£65000 - £75000 per annum + Benefits: Progressive Recruitment: The client is a...

Service Delivery Manager (Software Development, Testing)

£40000 - £45000 per annum: Ashdown Group: A well-established software house ba...

Day In a Page

Read Next
The economy expanded by 0.8 per cent in the second quarter of 2014  

Government hails latest GDP figures, but there is still room for scepticism over this 'glorious recovery'

Ben Chu
Comedy queen: Miranda Hart has said that she is excited about working on the new film  

There is no such thing as a middle-class laugh

David Lister
Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little