Yesterday was May 8th, which for Western Europe and North America is VE Day. The Russians, for technical reasons, mark May 9th as VE Day, but it’s essentially the same thing. It marks the formal surrender of Nazi Germany in 1945 and hence Victory in Europe day — the end of the war in Europe. By the 21st century, hardly anyone has patience for such ancient recollections, other than the Russians, who did the hard work in crushing the Nazis and lost 20 million people in the process — and, maybe for that reason, seem to have a longer historical memory than their Western peers.
This year, May 8th could be seen as marking a victory in Europe of another sort. Less than two years after the European Monetary Union seemed on the verge of collapse, potentially destroying the European Union itself and the vision of a democratic, liberal Europe that underlies the ‘European project’, the financial situation on the old Continent could hardly be more different.
The most important and dramatic change is in the bond market, where sovereign debts are traded. Two years ago, countries such as Greece, Ireland and Portugal that had undergone rescues and bail-outs, were treated as poisonous pariahs in the bond markets, there paper shunned by normal investors and picked at only by professional scavengers. Larger countries included in the PIIGS group, namely Italy and Spain, were also treated with great suspicion and their bonds had fallen to levels whereat the yields they offered were several times greater than those offered by German government bonds, the benchmark of European fiscal rectitude.
Yet in recent months, not just Ireland and Portugal, but even Greece — whose previous bondholders had suffered a ‘haircut’ closer to a scalping than a trim — have offered new bonds on the market, and have seen investors falling over themselves to snap up this new paper at yield levels that were lower than those paid by these countries during the boom years prior to 2008. As for Italy and Spain, their bonds keep rising in price, so that the yields on 10-year Italian and Spanish paper is now comfortably below 3% — the lowest-ever –and the spread between them and German bonds has also narrowed to historically low levels.
If the bond market is happy, then the equity market is positively ecstatic. Prices in the former crisis-countries have soared and many of the largest investment houses have been recommending European shares as better value than those offered by American or Japanese companies. Investment funds have poured into Europe, pushing not just the prices of shares and bonds higher, but helping the euro recover from below 1.2 dollars per euro at the nadir of the slump to almost 1.40 yesterday.
It all sounds wonderful, verging on the miraculous. How come, then, that the man credited with almost single-handedly turning round the euro crisis in 2012 — Mario Draghi, the head of the European Central Bank — was yesterday under great pressure from those same markets that he supposedly saved by saying, in August 2012, that the ECB would do ‘whatever it takes’ to stop the rot?
The amazing fact is that Draghi has never been called upon to make good on that open-ended commitment. At no time since then has the ECB stepped into the markets and undertaken a massive bond-buying operation, of the sort that the Federal Reserve Bank and the Bank of Japan have done for years. Given this unprecedented achievement, of merely ‘threatening’ the markets but not actually spending money, and thereby ending the panic and restoring order — why was Draghi on the defensive at yesterday’s bi-weekly ECB meeting and subsequent press conference?
The technical answer is that he was under pressure, indeed under attack, precisely because he has done nothing, printed no money, failed to expand liquidity — in the way that his American and Japanese counterparts have done and continue to do. But the real answer is much deeper.
The fact that Spain’s borrowing costs have been cut impresses no-one in Spain outside of the Treasury and the banking fraternity — because Spanish unemployment is 26% and youth unemployment nearly double that level. Real wages — for those with jobs — have dropped sharply over five years of deep recession and austerity. In Italy, the numbers are less dramatic but the malaise, if anything, is greater. As for Portugal and Ireland, as they watch their young people fleeing the country and taking its future with them, what have they got to be happy about?
In short, what the European financial markets are saying is the same story that is being told by the American and Japanese markets, just with a different accent. It is a story of governments straining to save their financial systems and shore up their banks, and managing to do so — at least in the short term and at great cost. The general public is told to ‘make sacrifices’ to achieve this great goal, but in fact it is being sacrificed to save the elite. This is undoubtedly an impressive achievement and a great victory, but by whom and over what?