Dan Roberts argues that it may be satisfying to turn fire back on the financiers – but indebted countries have never needed them more.
In times of crisis, the complex world of international finance clings to a very old-fashioned store of wealth for reassurance: gold.
The price of this precious metal shot up during the great banking crash of 2008 and hit new highs again last week amid investor fears that the next wave of the financial maelstrom could pull apart the eurozone and flatten our faltering economic recovery.
It is not just professional investors who are worried. Bullion traders report a sharp increase in demand from ordinary savers. Refineries in South Africa say they are overwhelmed by orders from Germany for Krugerrand gold coins. The Austrian mint says it ran out of its stock of similar coins last week, as the price of an ounce of gold broke through €1,000 (£850) for the first time.
In countries scarred by memories of hyper-inflation in the 1930s, the search for an alternative to the plummeting euro is understandable.
Northern European savers are particularly sceptical that the €750bn bail-out agreed last weekend to protect countries such as Greece, Portugal and Spain can be achieved without forcing the European Central Bank to follow the US and UK and turn on the monetary printing presses.
But inflation may prove the least of Europe’s worries if the monetary crisis becomes a lasting political or economic one.
The German chancellor, Angela Merkel, has already warned that the future of the European Union is at stake over how to deal with Greek debt.
President Nicolas Sarkozy of France went one better last weekend and threatened to pull out of the single currency if Germany didn’t agree to get its chequebook out to help. Many argue inflation is exactly what Europe needs.
So far, it appears the forces of common interest are triumphing over the national political backlash in countries like Germany. All of Europe’s economic recovery, including Britain’s, is at risk if big trading partners such as Spain are dragged into lasting recession by overly severe austerity measures. Big banks in France and Germany would be devastated if there was widespread default in Greece or Portugal, since they have done most of the lending.
European optimists hope the way to save the eurozone will be to complete the project by agreeing much closer fiscal and political union between the single currency members. In future, the hope is Germany would no more allow Greece to get into this mess than it would Bavaria.
Yet recognising how interconnected our economies have become does not in itself lessen the risks. In many respects, the credit crunch which began in 2007 has just jumped another firebreak: what began as a private sector banking problem has mutated into a sovereign debt disaster as nation states try to help, and is now becoming a supranational headache instead as the few remaining stable authorities, such as the EU and International Monetary Fund, get dragged in too.
Understandably, many are now again questioning the role that banks and traders have played in this saga – not least as a government-spurred recovery in bank profits once again drives personal bonuses to record levels.
In Europe, anger at the financial system is directed particularly towards London and New York, where most of the world’s currency traders and debt investors hang out. The EU is already working on plans to form its own credit rating agencies as an answer to what many see as an American hegemony.
The sober Swedes talk of a “wolf pack” of currency speculators bearing down on the euro. Matters may come to a head this month when the European commission tries to drive through strict new controls on hedge funds that have been consistently opposed by both Labour and Tory politicians.
Satisfying, and just, as it may be to turn fire back on the financiers, the complicating factor is that indebted countries have never needed them more. Perhaps only a root-and-branch reassessment of our financial system itself can save us now.
By Dan Roberts
Tags: banks, economic recovery, euro zone, european central bank, financial, financial markets, financial reform, Global Financial, IMF, investors, recovery economy, stock market
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