Trouble in the markets: Is the Eurozone crisis back?
There is trouble in the markets. Is the Eurozone crisis back?
The short answer is no. Not yet, anyway. But, almost unnoticed outside trading rooms in the City, things have been getting rather worse.
he optimism of the last couple of years, based on the hope that a return to economic growth world-wide would lift the Eurozone off the rocks, is dissipating very rapidly.
The arch-villain in all this is deflation.
Deflation - falling prices - is never good, but when Governments and individuals are heavily indebted it can be disastrous.
‘Debt deflation’ makes debts rise in a vicious circle that can quickly spin out of control.
The Eurozone is, of course, up to its neck in debt and the official inflation rate has fallen to just 0.3%.
That is the rate across the 18 member states, but in several of them, particularly in southern Europe, prices are actually falling.
The European Central Bank (ECB) has a target to keep inflation at around 2%, a mandate it is singularly failing to fulfill and about which it is doing very little.
This is why the markets are beginning to get very nervous, and why they have been falling rapidly this week.
Bond yields, or the interest rates at which Governments can borrow money, are beginning to rise sharply, not to anything like the levels we saw during the crisis of 2011/12, but the trend is worrying.
After looking so promising, the Greek government is once again have to to pay an interest rate of nearly 9% to borrow money in the international markets which is totally unaffordable.
At the same time the economic indicators in the Eurozone are almost all pointing downwards.
Exports have fallen for three months in a row. Even German manufacturing output is down sharply.
Efforts at reform in France and Italy, the second and third biggest economies in the Eurozone, are slow to the point of non-existence.
Indeed the Frenchman who won this years Nobel Prize for Economics, Jean Tirole, describes his country’s economy as “catastrophic” and is warning President Hollande that France must “reform or die”.
“We are at the mercy of an attack from the markets”, he said, an attack that today’s sharp falls may have moved a bit closer.
It is too soon to panic, but people would be happier if there was any sign the Europe’s policy makers were doing anything about it.
If current inaction continues, interesting times may lie ahead.