Bill Jamieson Waiting for the trigger

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Waiting for the trigger

For business Europe it has seemed like a crisis without end.

The year 2011 lurched from one euro crisis summit to another. Lofty declarations were made and earnest promises given. But even after the ‘momentous summit’ in December, the crisis of sovereign debt at the heart of the euro crisis still awaits resolution.

Thus has the eurozone limped into 2012 – and into recession. There is no resolution or even clarity on how the threatening debt problems of Greece, Italy and others will play out. Talk of a European ‘Grand Plan’ (version Four) not only left much to be desired, but it was also woefully short on detail of where the emergency bail-out funds would come from and how exactly it would work. Everyone waits for Germany and the eurozone to give in and resort to massive quantitative easing. It is like being caught in a prolonged game of Catastrophe Chicken. That is why, for all the conferences and the countdowns, it is still a pending storm in need of a catalyst, a denouement waiting for the trigger.

And until the trigger is pulled, the waiting has cast a pall over business and household confidence. Investment has stalled because it is almost impossible to make a commitment with any confidence in such conditions.

The Europe of 2012 has an ominous 1930s feel to it: a foreboding that what has unfolded till now by way of intentions to create rescue funds and declarations to amend treaties will seem in retrospect well short of the action required. We are paralysed by the sense that an epochal and traumatic change is about to erupt with appalling consequences we cannot predict and at a moment unknowable. Welcome to the Europe of 2012. We cope with it as best we can. We hope that the bomb of sovereign debt can somehow be safely defused. Until it is, we try not to look at those market screens too often. And we make the best we can of an unreal, ersatz normality.

For all the talk of Britain being ‘isolated’ in Europe there is no isolation at all from the effects of this crisis on the fragile UK economy. This country, too, is now almost certain to have been pushed into recession. Deepening contagion from eurozone banks could worsen a renewed credit crunch in the UK. The eurozone economy looks to be on course for a decline of economic activity (GDP) of almost one per cent – but it could prove to be so

much worse. In Greece, recession is deep and intractable. Deficit reduction targets are being missed. A Greek default and exit from the euro within a year is still widely predicted – but it is not this event in itself but its consequences that could prove profound as markets speculate on the next country to buckle. So long as this remains a credible scenario, a sustained recovery, not just in the eurozone but in wider Europe, remains impossible.

We are paralysed by the sense that an epochal and traumatic change is about to erupt with appalling consequences we cannot predict and at a moment unknowable.

German resilience

Bizarrely, for a currency at the centre of such fears, the euro has not collapsed, but has held up remarkably well. One reason it has done so is that the German economy is still capable of resilience. Figures showed German industrial production rising 0.8 per cent month-on-month in October, considerably better than the consensus had expected. Manufacturing activity rose 0.8 per cent, while civil construction and energy production both rose by about one per cent. Only building construction hardly rose at all (0.1 per cent). Coming on top of a 5.2 per cent increase in industrial orders recorded for October, this encouraged some to hope that, after a slight fall in GDP in the fourth quarter of 2011, the economy will recover to modest growth in the first quarter of the new year. But Purchasing Managers Index survey data remains weak and conditions are volatile.

Meanwhile there is the persistent sense of a ‘Minsky Moment’ approaching – an economic phenomenon that occurs when over-indebted investors are forced to sell good assets to pay back their loans, causing sharp declines in financial markets and jumps in demand for cash. The eurozone’s ‘moment’ has been staved off for now. But still the debt bomb ticks.

So what good news is there to count on? It is in thin supply – and all of it comes from outside the eurozone. Signs that inflation is moderating in China have given rise to hopes that there may be an easing of monetary conditions, thus boosting Chinese demand for overseas goods. In America there has been a notable improvement in employment figures while consumer confidence has also shown a mild recovery.

And here in the UK, inflation is set for a sharp fall in the opening months of 2012, while the central bank stands ready to resort to more quantitative easing – which it almost certainly will. However, according to an analysis by the Bank of International Settlements, the effect of such central bank intervention is weaker than commonly supposed and fire power is limited, given the extent to which government bond yields in ‘QE’ countries has already fallen. Those hoping for an ECB money printing miracle: take note. n