Sarkozy, miffed at the collapse of Lisbon ratification in Ireland, stated in Brussels last week that there could be no further expansion of the EU. This was opposed by other leaders who thought the EU should continue its relentless drive eastwards.
A factor that might have brought a little extra sobriety to the normally heady atmosphere at EU summits would have been the opinion expressed by Morgan Stanley, that the EU and the eurozone are about to be struck by a financial typhoon. European monetary union has appeared a picture of financial stability for ten years since it began, with no serious hiccups noticeable in its progress.
However beneath the surface, huge imbalances have been created, as here described, and they are getting worse –
Morgan Stanley says the current account deficits of Spain (10.5pc of GDP), Portugal (10.5pc), and Greece (14pc) would never have been able to reach such extreme levels before the launch of the euro.
EMU has shielded them from punishment by the markets, but this has allowed them to store up serious trouble. By contrast, Germany now has a huge surplus of 7.7pc of GDP.
The imbalances appear to be getting worse.
The latest food and oil spike has pushed eurozone inflation to a record 3.7pc, with big variations by country. Spanish inflation is rising at 4.7pc even though the country is now in the grip of a full-blown property crash. It is still falling further behind Germany. The squeeze required to claw back lost competitiveness will be “politically unpalatable”.
It is always possible that these figures seriously underestimate the problem of inflation, as ‘essentials’ inflation indices, which track the things people have to buy and taxes they have to pay, are giving inflation rates of more than double official rates.
Morgan Stanley said the biggest risk lies in the arc of countries from the Baltics to the Black Sea where credit growth has been roaring at 40pc to 50pc a year. Current account deficits have reached 23pc of GDP in Latvia, and 22pc in Bulgaria. In Hungary and Romania, over 55pc of household debt is in euros or Swiss francs.
Swedish, Austrian, Greek and Italian banks have provided much of the funding for the credit booms. A crunch is looming in 2009 when a wave of maturities fall due. “Could the funding dry up? We think it could,” said the bank.
Serbians who want to take a ride on the EU-backed lending boom, might take note. It could all be about to stop, and go into reverse. The US credit crunch was a property-based crunch, where bankers had overlent to house-buyers. The European crunch will be a double-whammy. Property prices and lending will fall rapidly, but so too will parts of the eurozone find that their country’s creditworthiness disappears.
The Huntsman recently pointed out that Germans will only carry German-identified euros, and refuse to hold euros from other EU countries. LINK HERE.
The split between the creditworthy Euro countries like Germany, and the less-creditworthy ones such as Italy, when it comes, will be sudden and devastating. Without the political progress of the Lisbon Treaty reassuring lenders, a change in the climate of economic confidence in the Euro could well happen all the faster.
Morgan Stanley warns of a coming ‘catastrophic event’, as the ECB insists on maintaining a higher interest rate level than it believes is wise in these circumstances. See the full article by The Telegraph’s Ambrose Pritchard-Evans HERE.
Could we see the rebirth of the D Mark and the Italian Lira, as the natural next step to the collapse of the Lisbon Treaty. The EU has missed its moment in history. By trying to be overly authoritarian and undemocratic, it became a political failure. The continent of Europe now faces the economic consequences of that political failure, with EU dreams sent crashing down in the ruins.