Four years of relentless austerity in many of the euro zone’s most debt-hobbled countries have forced many of their youngest and sometimes brightest workers to grab the plane, train or boat and emigrate in search of work. For countries with a long history of emigration, such as Ireland, this is depressingly familar — coming just 20 years after the country’s last debt crisis and national belt-tightening in the 1980s crescendoed, with the exit of some 40,ooo a year in 1989/90 from a population of just 3-1/2 million people.
As we wait for ECB Mario Draghi to come good on his promise to do all in his power to save the euro, the case for governments intervening in financial markets is once again to the fore. Draghi’s verbal intervention last week basically opened up a number of fronts. First, he clearly identified the extreme government bond spreads within the euro zone, where Germany and almost half a dozen euro countries can borrow for next to nothing while Spain and Italy pay 4-7%, as making a mockery of a single monetary policy and that they screwed up the ECB’s monetary policy transmission mechanism. And second, to the extent that the euro risks collapse if these spreads persist or widen further, Draghi then stated it’s the ECB’s job to do all it can to close those spreads. No euro = no ECB. It’s existential, in other words. The ECB can hardly be pursuing “price stability” within the euro zone by allowing the single currency to blow up.
Financial markets are odd sometimes. For weeks they have fretted about the outcome of the Greek election and its impact on the future of the euro zone as a whole. But today they appeared to dismiss the outcome despite a result that was about as positive as global investors fearful for euro zone stability could have hoped for. So what gives?
Just how miserable a month May was for global equity markets is summed up by index provider S&P which notes that every one of the 46 markets included in its world index (BMI) fell last month, and of these 35 posted double-digit declines. Overall, the index slumped more than 9 percent.
How are we looking? Fluid, very fluid!
In a classic case of call and response, the latest twist of the euro saga has seen the crisis escalate sharply in Spain and Italy (with the attempted cleanup of Bankia the latest trigger for a surge in government borrowing rates in both) only to see the European Commission today invoke major policy responses including the proposed use of the new European Stability Mechanism (ESM) to directly recapitalize euro banks, a single banking union, a euro-wide deposit protection system and even pushing back Spanish budget deadlines by a year.
Equities in the countries most exposed to the euro zone crisis seem to be being hit especially hard this year. The Datastream index of shares in Portugal, Italy, Ireland, Greece and Spain has a total return of -5.3% this year compared to +8.9% for a euro zone index excluding those countries.