As if news of the UK being plunged back into recession were not hard enough to stomach, political waves were made on the continent this weekend after Francois Hollande was elected president in France and threatened to shake up the European pact on austerity; Spain announced it is ready to bail out its banks amid a dive-bombing housing market; and Greece prepares to return to the polling station after its leaders failed to agree a coalition. The euro stands at €1.20 to the pound, the highest level it has seen in more than three years and a stark reflection of the choppy economic waters lapping at the EU.
The first Spanish bank in line for government help in Spain is Bankia, the country’s fourth-largest bank, and its chairman Rodrigo Rato (former managing director of the IMF) has run for the hills, resigning upon hearing the news that the finance ministry was planning to prop the bank up and introduce legislation that would protect its rivals. The economic situation is so bad that the government has hinted at the possibility of docking the Spanish navy’s only aircraft carrier in an attempt to save a tad more money: a measly €30m per year.
Spain’s situation has deteriorated rapidly in the last two weeks; with the announcement only days ago that it is back in recession and the level of unemployment is at an all-time high of nearly a quarter of the population. No wonder austerity is a hard sell to the hardest-hit economies: promising more unemployment to the electorate was never going to be a winner…
In France, the new Socialist president Francois Hollande has vowed to raise corporation and income tax for businesses and people within certain criteria, and to rip up the austerity pact agreed by eurozone countries under the watchful eye of Germany’s Angela Merkel. This morning, the 10-year French bond yield was up four basis points at 2.87% in response to the election.
Many will be surprised at how small an increase this is, given that lenders have generally flocked to countries with credible austerity programmes. But despite Hollande’s pledges to increase spending, there has not yet been any significant panic in the bond market, perhaps reflecting a growing sentiment that with at least five countries back in the recession danger zone, a less austere form of austerity might actually be worth a shot…
Meanwhile in Athens, a veritable dramatis personae of political names is being bandied about as the country’s parliament fails to agree a coalition and actually form a government. This is a disaster for the ailing country, where political instability will inevitably make it even harder to address the economic tangle. Fears that Greece may bail out of the euro altogether are also re-appearing, prompting worry that, in a worst-case scenario, the break up of the European Union is back on the cards.
So, a seemingly apocalyptic set of circumstances has unfolded in the eurozone, and there’s nothing we can do but watch. It makes Boris Johnson’s victory in the Mayor of London election seem as significant as an episode of Neighbours.