James Carville, Bill Clinton’s pugnacious chief of staff, once said that, if he were to be re-incarnated, he would like to come back as “the bond market because then you can threaten anyone”. With Europe’s capitals still reeling from the decision by Standard & Poor’s to downgrade the credit rating of nine eurozone countries, he might consider reincarnation as a rating agency instead.
In the European Parliament last week, German conservative Elmar Brok accused S&P of having “declared a currency war against us” and was widely applauded. Many rightly question the legitimacy of the power wielded by the big three rating agencies — S&P, Moody’s and Fitch — which can effectively hold countries to ransom particularly as they were responsible for awarding AAA ratings to the asset backed securities made up of sub-prime mortgage loans which caused the 2008-9 crisis. Such is the herd behaviour of financial markets that a decision to downgrade a country’s rating is taken as gospel truth, with the result that a nation’s borrowing costs go up, putting a further squeeze on their public finances.
S&P’s bombshell was merely the latest overreaction by the markets to the sovereign debt crisis — Spain and Cyprus suffered a two notch hit despite having, like France, a far better debt and deficit situation than the UK – but it scarcely came as a surprise. Although there was cautious optimism early in the month when Spain and Italy managed successful bond auctions with the interest rate falling to its lowest level since last summer, rumours about a mass downgrade by the ratings agency were doing the rounds before Christmas.
But while “Black Friday” moved the condition of the eurozone — as well as the rest of the EU including the UK — from serious to critical, the political symbolism of S&P’s move was as important as its implications for Europe’s economies.
This is because while it is right to question the illegitimate power of the rating agencies, and their role in creating and then deepening the current crisis, it is the failure of Europe’s supine political leaders that has ceded control over economic policy from democratically elected governments to rating agencies and the bond markets. For all their protestations about US rating agencies declaring war on the euro the reality is that Brok’s boss, Angela Merkel’s pursuit of a masochistic and fundamentally unworkable monetary policy is, in large part, responsible for S&P’s decision.
In fact — though it pains me to say it — the rating agencies are actually doing us a favour. At every stage of this crisis action has been forced on politicians. For example, in early 2010 Merkel and most other EU leaders promised that there would never be an EU bail-out fund. Then market pressure meant that, in May 2010, the European Financial Stability Facility was created. Then they said that there would never be a permanent bail-out fund. In spring 2011 the EU treaties were amended to set up the European Stability Mechanism. Apparently there would never be a hair-cut on Greek debt. The December EU summit offered a 50 per cent right-down of Greek debt which is now being concluded between the Greeks and bond-holders. We have gradually edged towards sensible crisis-resolution not thanks to politicians but because of the financial markets.
Moreover, before we rush to condemn the markets, we should also remember that the departure (finally) of Italy’s oft-disgraced but indefatigable leader Silvio Berlusconi was brought about not by one of his many scandals but because yields on Italian debt were spiralling out of control. To misquote the Sun: It was the bond market wot done it.
We are, of course, treading on very dangerous ground when unaccountable markets or neighbouring governments are able to force out elected governments but is there some truth to the idea that the debt crisis is too important to be left to politicians?
Last October Luxembourg’s Prime Minister Jean Claude-Juncker came out with the phrase that defines the political response to the crisis thus far. “We all know what to do, we just don’t know how to get re-elected after we’ve done it,” he said. It’s a remark that is both infuriating, but accurate. I suspect that even Merkel and Sarkozy know that their beloved fiscal compact treaty, with its rigid budget discipline, is at best a diversion and at worst a complete waste of time. The prospect of either of them admitting this before their respective elections is extremely remote. The real solution for the euro area — which will inevitably involve a large dose of money-printing by the ECB and common Eurobonds alongside stricter rules on budgetary discipline, and possibly the exit of several countries — seems to be too frightening a prospect for politicians to dare mention it.
But Europe’s political leaders need to decide, and quickly, if they have the balls to take the difficult and unpopular decisions that are necessary if the euro is to survive and the European economy to recover. If they choose inertia then the rating agencies and bond markets will continue to decide for them. And as for those who worry about Juncker’s dictum, the demise of Berlusconi should carry a salutary warning: the markets don’t care if you won the last election, if you can’t govern, you’re a goner.
Ben Fox is chairman of GMB Brussels and political adviser to the Socialist vice-president of economic and monetary affairs.