George Osborne and Dangerous Times
The news from Ireland is two edged. The good part is that it is going to be rescued. The bad part is that although Ireland made huge sacrifices to get its economy in order, it still needed rescuing. The bad part, like an iceberg, goes very deep.
The first element is the lack of an executive government for the euro area, managing the euro economy as a whole and setting out the limits of what members of the currency can do. All the chickens flying about connected to that fundamental issue, are now coming home to roost. The Euro is in trouble. Whether it is the kind of trouble which will strengthen it in the end or bring it down, nobody yet can tell. Any who says they can are guessing or thinking wishfully.
We now find ourselves part of the rescue. As shareholders in the IMF that is very proper. To make a separate loan, described as a good neighbourly act, is not proper at all. This is because Ireland is in the Euroand it is Euroland’s job to sort this out. Also, and more important, we do not have the money to lend. We have to borrow it first. That is utterly indefensible. We need to remind ourselves that our true national debt is £4.8 trillion and our total debt as a country including private, public and business, is approaching £10 trillion (according to PWC). When interest rates rise, as they will, this will suck out a good deal of GDP. Another £7 billion is a drop in the ocean, yes, but we cannot afford it and the last straw….etc.
Behind the Treasury thinking is the spectre that we have learned that RBS, that profligate bank, has a total exposure in Northern Ireland, which is heavily intertwined with Irish banks, of an eye popping £53 billion. If anything goes bang in the Irish Republic, the shock waves will decimate the Ulster economy and spread back to RBS with further massive losses to the U.K taxpayers who own nearly half its shares. To cover those losses more money will have to be borrowed. Suddenly things would get very difficult because when it comes to a real crunch, Britain is technically bust.
The vultures in the market may sense this and start to circle. It is to ward them off the Osborne has acted. It may work. It may not. On the face of it the Euro rescue will either work or not. £7 billion from us will make no difference one way or another. But with the gesture we earn the right to be rescued ourselves. Maybe that was the motivation in the Treasury.
Because everyone is now in grave danger. All our plans and forecasts do not take account of a further major financial implosion in the banking system and the sovereign debt sector, because we have no margin left. This is were one of the most critical figures of all looms into view. At the start of the global financial crisis the combined foreign exchange reserves of the Eurozone, America and Britain together added up came to no more that 8% of the total in the world. It has got worse since. When it comes to the ultimate crunch the West has run out of money.
No wonder George Osborne is anxious.