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That global financial markets could drive Italy and/or Spain into the same parlous financial state as Greece, Ireland and Portugal scarcely bears thinking about. A senior economist at a top-ten eurozone bank admitted privately last week that his giant institution would “be swept away” if Italy became caught up in peripheral Europe's debt meltdown. The European Banking Authority's stress tests, released last Friday (15 July), did not directly address the liquidity risks that transatlantic banks would face if the looming disaster were not contained.
Lawrence Summers, until last year President Barack Obama's top economic adviser, warned on Monday (18 July) that with the tumult in Italian markets, the European financial crisis had entered “a new and far more dangerous phase, threatening both European monetary integration and the global recovery”. He should know. For what helps to make the current crisis so dangerous is that confrontational politics in the US have increased the chances that it too may slip towards its own, self-induced, sovereign debt disaster.
With debt disasters looming on both sides of the Atlantic, it is little wonder that behind the scenes, finance ministers and central bank governors of the Group of Seven (G7), a body which some observers thought had been displaced by the wider Group of 20 (G20), have once again been hard at work. The G7 has already held at least one conference call on the Greek crisis – during the weekend of June 18.
In a report released last week, the IMF itself warned of the perils ahead, saying that “the window of opportunity to prepare the [global] financial system against potential systemic shocks could close unexpectedly”. Even as these words were being discussed at a meeting of G20 deputy finance ministers in Paris on 9-10 July, the window of opportunity they referred to was starting to close.
As European Voice went to press, the financial markets were wondering whether eurozone leaders would, at their summit tomorrow (21 July), finally step back from the edge of the precipice.
Clear agreement on mechanisms through which private-sector lenders could be bailed in to a second Greek rescue package would be a start. Lorenzo Bini Smaghi, an executive board member of the European Central Bank (ECB), last weekend (16 July) indicated that an agreement is needed to allow the eurozone's bail-out fund, the European Financial Stability Facility, to buy on public markets the bonds of troubled sovereign borrowers.
Graham Bishop, a financial expert, says that eurozone leaders must finally adopt the comprehensive economic governance agenda proposed by the European Commission, enhanced by the European Parliament and backed by the ECB. “It's either political union of the eurozone, or disaster is at hand”, he says.
Such a disaster would be global, not just European. Given the weaknesses of the transatlantic economies and their tight integration, a second downward leg in, the so-called Great Recession” of 2007-09, would not be just a ‘double-dip'. It would turn into a catastrophic plunge reminiscent of the Great Depression of the 1930s.