ALEX BRUMMER: Euro is shaken to the core

By ALEX BRUMMER, CITY EDITOR
Updated:

European Union financial leaders may have thought that they were being terribly clever when they looked beyond the Irish crisis and decided to set up a new European Stability Mechanism, starting in mid-2013.

Given the speed at which events are moving in euroland, the creation of the ESM  -  like most of the steps taken since Greece ran into difficulty  -  looks far too desultory.

Instead of calming matters, the Ireland rescue has raised critical new issues for the single currency zone. It has told sovereign borrowers like Portugal that being part of a bail-out may be a cheaper way of borrowing than going to the market to raise funds. After all the Irish loans carry a coupon of 5.8pc.

A till full of euro notes

Cash in hand: Irish rescue has raised critical issues for the single currency zone


That is not much more than the 5.59pc cost of Spanish borrowing in latest trading and is fixed rather than subject to market whims.

Then there is the state of the banking sector. There was a big sigh of relief in the summer when the EU's stress tests on the banks were completed with most institutions passing with flying colours. We now know from the implosion of the Irish banks that the tests may not have been as exacting as they should have been.

The result is that pressure has started to build on those banks which are considered potential victims of euroland's crisis, including falling property values. French banks SocGen and BNP Paribas found themselves in the firing line along with the Spanish bank BBVA  -  where the shares fell 3pc to hit a new low.

If the crisis moves from the periphery to the bigger economies such as Italy and Spain  -  as looked to be the case in latest trading  -  then existing rescue funds will be totally inadequate.

The new ESB might need to be up and running much more quickly and investors should brace for a cut in the value of bank and sovereign-bonds. That could spell carnage-of a kind not seen since Lehman-went under.

Will power

Efforts to control executive pay have been singularly ineffective. Despite a series of reports dating back to Sir Richard Greenbury in the 1990s, the gap between those at the bottom of the income scale in publicly quoted companies and those at the top has increased exponentially.

In an interim report on fair pay for the government, economic writer Will Hutton records the extraordinary surge in pay among the top brass at Britain's top quoted companies in the last decade.

The pay for FTSE100 bosses rose to 88 times that of UK median earnings by 2009, up from 47 times in 2000. This astonishing gain took place despite improved corporate governance and greater disclosure.

Indeed, directors' pay continued its remarkable ascent through the worst recession since the 1930s when much of the rest of the workforce showed admirable restraint or lost their jobs.

At least directors of public companies operate in an open and transparent marketplace, where there is genuine competition for talent (if not as much as remuneration committees would have you believe.)

As Hutton finds in his interim report, the public sector has begun to mimic the wealth creating part of the economy even though it is largely a closed shop with most recruitment coming from inside.

Simply adopting private sector practice in the public sector might make little difference. Indeed it could, as in the case of quoted companies, irrationally lead to a never-ending upward spiral.

Nevertheless, the need for more fairness in the system is obvious. There are now 20,000 people in the public sector in the top one per cent of all earners, with an income of £117,523 per annum, of whom 4,000 are in the managerial classes. The plutocrat culture is spreading like wildfire from the BBC, at the top of the pile, to higher education and the NHS. Hutton makes the case for some kind of 'fair pay' multiple and is groping towards that.

We should never forget that whereas government cannot tell free market enterprises what they pay staff, it has every right to impose strict limits on the way taxpayer money is spent. It should do so.

Future shock

All those politicians including Gordon Brown and his former chancellor Alistair Darling rushing to produce inside accounts of the great panic and recession had better get their skates on.

The real story according to Julian Assange and WikiLeaks is on its way. Assange has told Forbes that a mega-leak on an American bank is coming in January. The authorities might regard that as a bit worrying.

In most cases, the leak of diplomatic documents has produced little more damage than red faces. In the case of a major bank, it could bring the whole global financial system tumbling down with it.

Yikes.

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