SERIOUS MONEY:JOHN MILTON, the revered English poet, was born on this day in 1608. His most enduring work, Paradise Lost, is considered by most scholars to rank among the finest pieces of literature ever composed.
Indeed, the epic poem, which was published in 1667, has inspired great writers such as William Blake, Samuel Coleridge, John Keats, and Lord Alfred Tennyson. The masterpiece presents the author’s version of the biblical story, contained in the Book of Genesis that reveals how man succumbed to temptation and fell from grace.
Fast forward to today and the hubris that features heavily in Milton’s work seems more than appropriate in light of the turmoil that has undermined investors’ confidence in the sustainability of Europe’s monetary union. The architects of the euro launched the single currency long before appropriate structures that would ensure its long-term viability were put in place and, when the periphery succumbed to the temptations that lower interest rates ultimately brought, the resulting external imbalances, were dismissed by the region’s technocrats as irrelevant.
Continuous cross-border financing however, could never be ensured given the flawed architecture and, the provision of external but intra-regional financing to the euro zone members with the largest current account deficits came to a shuddering halt, as the fragile situation in Greece spun out of control.
The serial offenders came under serious pressure, as investors somewhat belatedly took flight and pushed both Ireland and Portugal into the arms of the so-called troika, as the steep government deficits that followed previous private sector largesse, saw borrowing costs soar to levels that brought the solvency of both sovereigns into question.
The sorry episode demonstrated quite conclusively that the naive thinking espoused by the guardians of the single currency was well wide of the mark. Intra-regional imbalances did matter and, it’s fair to say that investors proved to be particularly careless in this regard, as reality should have been reflected in market prices once it became clear that the large external deficits built up in the periphery, reflected the accumulation of foreign borrowings used to satisfy current consumption, as opposed to productive investment that might promise economic convergence.
The flawed thinking was exposed under serious scrutiny but, worse was to follow, as the fiscal austerity programme heaped upon the Greeks plunged their economy into a modern-day depression and, revealed that a sovereign that has no control over the currency in which its debt is issued, can never be considered free of default risk. The truth of the matter is that a government that issues bonds in a foreign currency can never guarantee that it will be able to meet its obligations as they fall due.
This fact should have been obvious to those in the financial markets, who get paid big money to know but, market pricing suggests that the stark reality was either not understood or dismissed to the detriment of clients who placed their trust in the supposedly greater knowledge of financial markets’ elite. The truth is now plain for all to see and the resulting market action can only be described as mayhem.
The turmoil in the euro zone’s sovereign debt markets that was once confined to the miscreants in the monetary union’s periphery has steadily moved inward to infect the core. Panic in the investment community has ensured that not one single member of the currency union has emerged unscathed. Both Italy and Spain have been pushed to the brink but, the biggest surprise for many has been Germany. Perhaps investors appreciate that Berlin has as much control over its legal tender as Dublin, and as a result cannot and should not be considered safe. Then again, maybe investor concerns simply reflect the fact that should the euro survive, the Germans will have to shoulder heavy burden to bail out its struggling brethren or, face massive banking losses in the event of a disorderly break-up. Either way, the top credit ratings afforded German government debt is just as suspect as weaker euro zone constituents.
The attack on Germany confirms that the single currency’s crisis has entered the end-game, and cause for hope is decidedly short. The incremental moves that have been made by Europe’s leadership in summit after summit to date, have failed to appease financial markets for long and investors have become increasingly restless in the face of indecision.
The outcome of today’s summit should define Europe’s future and, hopefully it is the path of further integration. Nothing less will do and further attempts to muddle-through are virtually certain to fail. It’s time for Europe’s leadership to stand up and be counted. As Milton wrote, “Awake, arise or be for ever fallen.”
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