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IF THIS is the week that senior traders and investors return to their desks
(British children are returning to school), they have not returned from holiday
in a very cheerful mood. As I write, the DAX is down 3.7% and the FTSE 100 is
off 2.2%; Italian bonds are falling for the 11th successive day.
Some of this could be a hangover from Friday's jobs report in the US, and from
the lawsuit launched by an arm of the government against the banking sector.
But Europe's wounds are also self-inflicted. Let us sum up the recent news. The
Greek talks with its multinational lenders have been suspended (broken down?)
on signs the government is missing its targets; Italy's politicians are
backtracking from the measures unveiled in its austerity budget. Europe's Plan
A - that countries will bring their debts down through fiscal discipline while
the markets wait patiently - looks less and less likely to succeed. In the FT,
Wolfgang Munchau said that
the very least one should expect is for the eurozone to abandon all austerity
measures with immediate effect
Actually, that is rather a lot to expect. Just to illustrate the confusion
among policymakers, Christine Lagarde, the new head of the IMF, said at the
weekend that European countries should
consider stimulus measures to drive growth
while Jean-Claude Trichet, head of the ECB, called for faster implementation of
austerity measures.
Plan B for the euro-zone was for fiscal union, meaning that the Germans would
guarantee the debts of the periphery. But with Angela Merkel suffering her
fifth regional election defeat of the year, the German government will be more
reluctant than ever to sign a blank cheque.
While the authorities bicker, the borrowing costs of banks are rising as US
money market funds retreat from the region. The costs of insuring against
European corporate defaults has risen 7% today. That will make the banks even
less keen to lend; the annual growth rate of private sector lending was just
2.4% on the latest data.
Animal spirits may not be the only factor that drives an economy. But when you
consider all the above factors - sovereign debt crisis, fiscal austerity, bank
funding pressures, weak credit growth, falling markets, political drift - the
background facing consumers and businesses is very gloomy. Only those German
companies exporting to China can feel immune.