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DIAMOND'S NOT FOREVER
By John Newsome on 25th July 2012


The advert for Barclays' tracker rate mortgages urges borrowers to 'take one small step'. Although hardly on a par with Neil Armstrong's efforts, Bob Diamond did exactly that in the wake of the bank's £290m fine for attempting to rig LIBOR. It is, without doubt, a sorry tale. A potent cocktail of power, laced with arrogance and garnished with insincerity but that's enough about the Commons Treasury Select Committee.

 

So, the aftermath of the 2008 crisis claims another scalp with both politicians and financial titans having fallen victim to electoral, regulatory and shareholder backlashes. However, there remains one place where reality, despite loudly banging on the door, rarely gains entry. We speak of the Eurozone, of course.

 

Benoit Coeure, executive board member of the European Central Bank, recently backed the buying of stressed sovereign bonds (Italian, Spanish etc.) by the European Financial Stability Facility in order to lower borrowing costs by artificial means. He opined that the high cost of borrowing currently being imposed on Italy and Spain was not a reflection of economic fundamentals but "the anxiety of market participants as regards the course of political decisions to be taken". Mmmm ……. with that level of optimism, if the day job goes phut, he may fancy becoming head of I.T. at Royal Bank of Scotland.

 

Chancellor Merkel seems to understand the situation, though. In response to calls for common Eurozone bonds, unsurprisingly favoured by France, Italy and Spain, she responded "not as long as I live". 'Nein' would have sufficed but there can be no misunderstanding that Merkel has no interest in shouldering the liabilities of the continent's reprobates; at least not without substantial German input into such states' fiscal policies. It is difficult enough to imagine Rome or Madrid accepting that but Paris? Even Jimmy Carr's accountant couldn't swing that one.

 

Despite endless summits, the problems of the Eurozone remain. In truth, they are insolvable under the current arrangements. There are now only two courses for the currency bloc to take. The Eurozone shrinks to a core of nations which have sufficiently similar economies and fiscal discipline to make a success of a single currency; by definition, this means certain countries leave and return to their own currencies. Alternatively, the Eurozone takes integration to its logical conclusion with full fiscal union.

 

No doubt those responsible for creating this mess will have no shame in advancing the latter argument as it would transfer even more power to the centre. It is more than a blessing the UK retained Sterling despite much propaganda extolling the virtues of a single currency at the end of the 1990s. Calls for Britain to adopt the Euro may seem ridiculous now but original proponents still don't appear willing to concede. Lord Mandelson said recently "The Euro isn't a failed project". Small wonder he allegedly couldn't tell the difference between guacamole and mushy peas.


John Newsome can be contacted on:
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