Fear grips the Treasury and the Bank about the consequences of the total disintegration of the eurozone
Among the British political class, especially those of them with an expensive education, an interest in Greek democracy used to mean you had studied Pericles. Not now it doesn’t. Today’s Greek election is probably the most crucial in that country’s modern history and will certainly be the most watched in Britain. Politicians, policy-makers and opinion-shapers who would normally stay up for an election in another country only if it was for the American presidency will be delaying their bedtimes for the results from Athens.
For one group of people, this is a lip-smackingly exciting moment. The most euro-hostile wing of the Conservative party hopes the Greeks will bring on the climactic existential crisis for the eurozone. For a certain kind of right-wing Tory, the most desired outcome is victory for the Greek far leftists who reject the terms on which their country has so far clung to euro membership. The collapse of the entire currency would follow – or so these Tories hope. That relish at the prospect of Armageddon in euroland is not shared by senior members of the government, Tory or Lib Dem. Their pulses are also raised by this election, but pumping through the veins of the highest reaches of government is fear of the consequences for Britain of a collapse of the euro. That dread is compounded by their lack of power to shape events on mainland Europe.
This powerlessness is communicating itself to the voters. People familiar with the results from the coalition’s private sampling of public opinion say that voters are alarmed by the prospect of a euro-zone implosion and conscious that Britain can do nothing to prevent it. “The focus groups are saying, ‘We need to know that you’re doing something to prepare for the worst.'” Hence the line in George Osborne’s recent Mansion House speech: “We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend the economy from the crisis on our doorstep.” The schemes unveiled in that speech, along with emergency measures to improve liquidity announced by the Bank of England in a choreographed move between chancellor and governor, were designed to be both assurance and insurance. Insurance against a euro meltdown and assurance to the British public that its government has contingency plans. Some have rightly sniffed panic in the timing of these announcements. Though the chancellor and the governor seek to project a calm confidence in public, the corridors of the Treasury and the Bank reek of terror. They know that there is no firewall that they could possibly construct that would fully protect Britain from the consequences of an anarchic disintegration of the euro.
“We would be waving goodbye to a massive chunk of our GDP,” says one minister. A few months ago, the chancellor and his friends rather liked it when the TV screens were full of rioting Greeks, angry Italians or suffering Spaniards because they thought it helped them make the case that their austerity programme had avoided something similar in Britain. The convulsions in the eurozone were a useful diversion from their own policy mistakes. But things are now much too grave to be seen through such a glib political prism. While the chancellor has to try to look like the master of events in public, privately his friends acknowledge that he is virtually impotent in the face of the single biggest influence on British economic prospects and the Tory party’s chances at the next election. Says one of those friends: “It is out of our control.”
As a non-member, Britain’s capacity to shape events in the eurozone would be capped under any government. What leverage Britain might have had was reduced by the veto (that was not really a veto) that David Cameron wielded in Brussels at the end of last year. His rejection of the fiscal compact played well with his party and quite a lot of British voters, but had no practical effect other than further diminishing the already low European appetite to listen to British advice.
The wildest euro-haters on the Tory benches don’t care about that. If Britain had any decent advice to offer, they’d actually prefer it wasn’t listened to. For they lust for a collapse of the euro for the atavistic pleasure of being proved right that the entire project was fatally flawed from its inception. They also yearn for doomsday because they believe the end of the euro would pave the way for Britain’s departure from the European Union. As one senior government figure puts it: “It is very easy to go from ‘I told you so’ to ‘Bring on the end.'” To be entirely fair to them, some of this tendency are also motivated by a sincere belief, with which I have a lot of sympathy, that it is both inhumane and politically unsustainable to try to keep Greece within the euro when the pain for that country is so horrendous. A more sophisticated strand of euro-sceptic opinion is mindful that a Greek exit would have consequences that could be dangerous for Britain. But they have come to a conclusion that continually postponing the day of reckoning with half-done deals and botched-together bailouts is actually worse than letting events come to a head. A few months of extreme instability is preferable, they reason, to years of drift and stagnation in Britain’s most important export market. The word “cathartic” is much in vogue with this growing body of opinion in the Conservative party. A fashionable metaphor is the “tropical storm”. Better, so goes the argument, to have one thunderous weather event to resolve this once and for all. After the clouds have burst, the sunshine will come out again. A parallel is drawn with the crisis over the Exchange Rate Mechanism in the autumn of 1992. Britain’s ejection from the ERM was painful at the time and humiliating for the Major government, but soon after the economy began to recover.
What’s interesting about the prime minister and chancellor is that this argument has not been persuasive with either of them. Though two of the most instinctively euro-sceptic people ever to hold those positions, they have not embraced the idea that what the eurozone needs is catharsis through extreme crisis. In that Mansion House speech, Mr Osborne came close to saying in public what he says in private: wishing for a Greek exit is a very high-risk strategy. It might concentrate the minds of European leaders and finally impel them towards a comprehensive resolution of the contradictions within the eurozone. Then again, it might well not. As one ally of the chancellor puts it: “You’d have to be very confident that there is a bloody good plan for dealing with the consequences of a Greek exit.”
Both the Treasury and the Bank of England are seared by their joint failure to anticipate the financial crisis that began to unfold in 2007 and came to a head with the crash of 2008. In the years running up to it, they had prepared contingency plans for dealing with a shock to the financial system from terror attacks, avian flu, anything but a systemic crisis in the banks themselves.
The mantra from officials within both institutions is that they will not make the same mistake again. The Bank of England and the Treasury have conducted war games on what would happen in the event of the ultimate euro crisis: one or more of its members falling out of the currency. In the most optimistic scenario, the only departure is Greece and the exit is reasonably well-ordered. The damage is relatively limited as the European authorities successfully prevent contagion from spreading to consume other countries. In the blackest scenarios, the consequences of a Grexit are cataclysmic. It sparks a firestorm that engulfs all the euro-debtor nations. When the flames begin to devour Italy, even the financial clout of Germany is not sufficient to contain the conflagration. There are multiple bank collapses across Europe, including Britain, which make the crash of 2008 look like a mere hiccup in capitalism.
What makes these exercises even more scary for their participants is that they know that their war gaming is only an educated guess about the shape of the apocalypse. Even a controlled Greek exit would be pregnant with considerable perils. This is because there are so many of what Donald Rumsfeld would call known unknowns. In the event of one or more members of the eurozone reverting to an independent currency, what happens to debts and other contracts denominated in euros? The truth is that no one really knows.
One member of the National Security Council, a forum where international terrorism and an Israeli strike on Iran can be on the agenda, also attends meetings to discuss what could follow a euro collapse. Of the two, he says the euro briefings are much the more frightening. Another insider says: “These are some of the most sober meetings you have in government. They are not meetings you come out of cracking jokes.”
If there is any humour at the fear-flecked heart of government, it is of the deeply black variety. The sense of being powerless in the face of impending doom is captured by one senior figure who says: “We’re just waiting to see if the asteroid that is hurtling towards us will hit.” What makes it the more terrifying – for them and for us – is that they are not in a position to do anything to stop it.