Risks for do-nothing European Union

By ALEX BRUMMER, CITY EDITOR
Updated:

 

There is no doubt which issue will dominate today's European Union summit in Brussels.

The Greek crisis and concerns about sovereign debt across a swathe of euroland nations will have to be dealt with.

What the Greek episode is demonstrating is how hopeless euroland is at decision-making.

The only serious eurozone institution, the European Central Bank, has a narrow monetary remit. The ECB did demonstrate a willingness to act when financial markets froze over in August 2007.

But it does not have the direct powers to intervene in a fiscal crisis. This is partly the eurozone's own fault. The 'Stability and Growth Pact' was put in place precisely to ensure that eurozone countries would keep borrowing and debt levels under control.

It has never been enforced properly and countries from Ireland to Portugal have been able to run up enormous debts.

This has been possible without fear of a currency shock because of the ballast provided to the euro by larger and more stable economies.

If there is to be some kind of bailout for Greece - the markets now seem to be convinced that up to 20bn euros could be on the way - it will be decided in Berlin and Frankfurt rather than Brussels.

Germany has the balance of payments surpluses to help pay down Greek debt. The question is, can euroland find an umbrella under which it can impose fiscal conditions on a sovereign nation? It will be hard to do without creating a currency area made up of first and very second-class citizens.

In many ways the best answer lies with the International Monetary Fund which has both the resources and the powers to impose draconian reforms. As in Britain in 1976, Latin America in the 1980s and less successfully in the Asian crisis of 1996-97 the Fund can prove a useful-shield for governments seeking to impose harsh domestic policies.

Gordon Brown has indicated that Britain (not itself in the strongest of fiscal conditions) would be willing to help through the IMF. It might also be possible for the Fund and the European Commission to act together. Further destabilising delays are not acceptable.

If the contagion is allowed to spread then it might be impossible to avoid a downward lurch for the financial markets, the banking system and the global commerce. No one should underestimate how fragile the world economy still is as Mervyn King made clear in his Inflation Report briefing.

Savers required

There is grim news then for the mortgage lenders from the Governor-At the outset Mervyn King was never a great advocate of the Special Liquidity Scheme which bought in sticky mortgages for cash. But he understood the necessity of putting something in place in 2008 when the government feared a cascading series of Northern Rock-style crashes.

As matters turned out the troubles came anyway with mortgage banks Bradford & Bingley, Alliance & Leicester closed to new business or sold off. Indeed, were it not for the SLS there must be some questions as to whether Halifax Bank of Scotland, which was eventually rushed into the arms of Lloyds, would have lasted through to the autumn of 2008.

With the possibility of £185bn of liquidity removed from the housing finance markets the mortgage lenders are going to have to think very hard about attracting greater volumes of retail deposits and reentering the wholesale markets. The removal of the government guarantee from savers with Northern Rock, ahead of any sale to the private sector, will be an important test of whether the confidence of savers has been restored.

What the end of the SLS will certainly-mean is that the very best financed banks, with access to wholesale markets, will have a sharp competitive edge. Instead of the new banking environment of competing retail banks - dreamed of by the Chancellor Alistair Darling - it could paradoxically mean more consolidation of home loan services.

Strong finish

Reckitt Benckiser has a habit of surprising on the upside and did so again in recession-hit 2009 with strong underlying growth in the fourth quarter, margins to die for and an end-of-year cash surplus of £220m.

Moreover, its record for innovation, built around existing products, remains second to none. But does the world really need a Finish 'Automatic Detergent System' dispenser which gives the dishwasher 12 washes without having to reload the soap tablets? Even chief executive Bart Becht had trouble breaking into the packaging to gain access to the mountain of plastic inside. It suggests to me that sometimes simple is best.

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