Markets sometimes move very fast. And so it has been with Ireland. The deal is not yet done though the broad outlines of the rescue package are clear. But we know it will be done and so the markets are already moving their focus to the plight of Portugal, which will most probably need further funding, and Spain, which may well need it. And then, who knows... Italy, Belgium, or even the euro itself?
You can see this as predatory behaviour by investors: once they have devoured one victim, that merely whets their appetite for the next. There is doubtless something in that. But you can also see it as fear, a fear that a country to whom you lent money in good faith will be unable or unwilling to repay it in full. So the savings of the pensioners whom you represent will be lost. Better get out before the paella hits the fan.
So we will now have several months of disruption, and disruption by its very nature is unpredictable. My guess – and it can be no more – is that Portugal will need support to fund its borrowing needs, which will be doable, but if Spain also cannot make it, then scraping together the funds for a rescue will be a stretch. I think the euro itself will survive this crisis because the political will to hold things together is so great. I have long felt that it will be the next downturn, towards the end of this decade, that breaks up the Eurozone. But I am troubled that people whose judgment I trust think that it may collapse earlier.
Whatever the outcome to the euro, politicians the world over are having a crash course in economics. It is brutal. They are being forced to grasp not only that there are finite limits to their ability to borrow from the markets but that those limits may change in an arbitrary and sudden way. A few weeks ago confidence that Ireland would not need a bailout was rising, then suddenly a chance remark by Angela Merkel regarding bond guarantees beyond 2013 and, bang, game over.
This will change politics everywhere. Voters will want caution in national finances, coupled with market reforms. They will want people like Ludwig Erhard, the German minister of economics, who created the framework of the post-war economic miracle. Or people like Manmohan Singh, whose financial reforms in the early 1990s catapulted India into its sustained growth spurt. Or even early Gordon Brown, whose caution during his first term as chancellor was exemplary and whose most positive legacy may turn out to be that he managed to resist pressure from Tony Blair to push us into the euro.
When politics and economics clash, economics always wins in the end. The trouble is that it can take a while to do so and there is a lot of collateral damage on the way.
Germany's surge will go on and on
Something more uplifting: the German economy. We have just had the final figures for the third quarter and they show growth at 0.7 per cent, or annualised a little under 3 per cent. Year-on-year growth is a little higher, 3.9 per cent. Several things are encouraging here. As has been widely appreciated, German exports are cracking on, up nearly 17 per cent year-on-year, as the new rich of the world snap up their Mercedes, BMWs and all the other top end products at which Germany excels.
But domestic demand is doing well too, with both investment strong as you might expect, but consumption recovering decently too. Looking forward there is really no sign of any serious slackening. There was some other data out yesterday on consumer confidence, a survey by GfK, which showed that confidence was the highest for three or four years. There was also a strong purchasing managers' index, which measures company expectations for future demand.
All this is important and not just for Germany. It is important for the Eurozone. Germany is of course Europe's largest economy and its imports (true, not all from Europe) are running up 15 per cent on last year. Inevitably the countries most closely affected are those that are physically close: France, the Benelux, northern Italy and parts of Eastern Europe. But it is also helpful for Britain too. Last year we exported £24 billion of goods and £10 billion of services to Germany and it will be more now.
Falling house prices isn't all bad news
The main item of UK economic news was the weak mortgage lending figures and the implications this might have on house prices. The number of new mortgages in October fell to a 19-month low at a bit under 31,000. That compares with more than 45,000 in December 2009. Net lending is running at £1.7bn a month, around two-thirds of the level at the end of 2009.
So what does this do to house prices? The conventional wisdom, never to be ignored, is that prices will be flat or fall slightly next year, but some commentators, among them Howard Archer at Global Insight, go further. He suggests that in 2011 prices could fall by 10 per cent from their peak earlier this year.
Let's just assume that is right and consider the consequences. If you want to see the whisky bottle half empty this will mean that house prices give no support to consumption next year, and consumption will in any case be squeezed by the higher VAT.
If, on the other hand, you prefer to see the bottle half full, then by the end of next year, given a bit of earnings growth, prices will be back into their normal post-war relationship with earnings – towards the top end of the range to be sure, but no longer way outside it. And of course prices will have become a bit more affordable for first-time buyers. We will be quite a way along the path to sustainable house prices, which cannot be bad.Reuse content