The End of Alchemy by Mervyn King
Author:Mervyn King [KING, MERVYN]
Language: eng
Format: epub, mobi
ISBN: a9781408706121
Publisher: W. W. Norton & Company
Published: 2016-03-02T16:00:00+00:00
Greece became the first major European country to experience a depression on the scale of the 1930s Great Depression in the United States. Between 1929 and 1933, total output in the US fell by 27 per cent. In Greece, output fell between 2007 and 2015 by slightly more than that, and domestic spending (consumption and investment in both private and public sectors) by no less than 35 per cent, an outcome I would never as a student in the 1960s have imagined possible with our new-found understanding of how to prevent depressions. There were, and remain, many inefficiencies in the Greek economy. But in the absence of political union, decisions about them are for the citizens of Greece. In March 2012, Greece defaulted on, or to be precise ‘restructured’, its debt. The restructuring transferred much of the debt from private to public sector creditors. By 2015, around 80 per cent of Greek sovereign debt was owed to public sector institutions elsewhere in the EU or to the International Monetary Fund. Monetary union, far from leading to greater political integration, was proving the most divisive development in post-war Europe.
By the end of July 2012, exit from the euro for Greece and perhaps others was becoming accepted as likely. The ECB, the European Commission and the German government had plans for how to handle a Greek exit. It was widely assumed that exit would imply the imposition of capital controls in Greece, and probably a bank holiday to allow the government to nationalise many, if not most, of the local banks. Then came the démarche that transformed market sentiment. At a Global Investment Conference on 26 July to mark the start of the London Olympic Games, I chaired a panel of central bank governors. One of them was Mario Draghi. As he stood up to make his remarks, I noticed that, unusually, he did not intend to read from a prepared text. The ECB would, he said, ‘do whatever it takes to preserve the euro. And believe me, it will be enough.’21
His words reverberated around the world, but just as important was the joint statement made the following day by Chancellor Merkel and President Hollande, indicating their full commitment to the euro and support for Draghi’s intention. It was clear that the ECB would buy, or was actively considering buying, Spanish and Italian sovereign debt. Spanish ten-year bond yields fell back from 7.6 per cent to below 7 per cent. Bank shares in the euro area rose between 5 and 10 per cent on the day. It was the start of a marked change in sentiment that was to result in significant falls in sovereign bond yields over the next two years. By the end of 2014, ten-year yields in Greece had fallen from 25 per cent to just over 8 per cent, Portuguese bond yields from over 11 per cent to under 3 per cent, and those in Spain from over 6 per cent to below 2 per cent. Indeed, by the end of 2014 Spain was able to borrow more cheaply than the United States government.
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