15 September 2011

Stewart Fleming: Fiddling while Europe burns

For more than a decade, the most widely used forecasts have more or less ignored the financial sector, the activities of investment banks and stock markets, and foreign exchange, bond and derivatives trading, at a time when these financial-sector businesses have come to dominate day-to-day economic activities.

This simple fact helps to explain not only why the transatlantic economies are in such dire straits, but also why the numbers in the economic forecasts that the European Commission will publish for the European Union today, that the Organisation for Economic Co-operation and Development (OECD), the rich countries' think-tank, issued last week, and that the International Monetary Fund (IMF) will release next week, are of so little value. They did not predict, and cannot capture or explain, this summer's traumatic collapse in consumer and business confidence, and the crushing of the “animal spirits” that the British economist John Maynard Keynes identified as one of the great forces driving economic activity.

Just when a show of G7 unity was needed, Tim Geithner, the US Treasury secretary, decided to use the Marseille meeting to let long-simmering US frustration boil over in public, blaming Europe for the crisis of confidence. He has a point.

If Congress agrees, the US, thanks to President Barack Obama's new budget proposals, will have opted for more fiscal stimulus. But is this the way forward for Europe with its stronger social safety net? Britain seems to be heading for more unconventional monetary stimulus, anathema to hard-money advocates at the ECB, not least because they doubt its efficacy. Most analysts, including Trichet, seem to have concluded that the eurozone needs much tougher instruments to enforce fiscal discipline on miscreant members. But time is running out and political procedures in the EU and the eurozone are proving too time-consuming.

The search is on for an initiative to reduce the crisis-management burden on the ECB. One option being closely examined is to turn the official bail-out fund, the European Financial Stability Facility, into a bank. Officials who have looked at the details believe that this could be done without legislation in the 17 eurozone states.

The disorderly disintegration of the single currency would be another body blow, not only to the transatlantic region's economic performance, but also to the already tarnished image of the West's model of capitalism and to the global political influence and prestige of the US and Europe.

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