Over the past month, a palpable sense has grown that the global economic crisis triggered by the 2008 banking crash may only now be getting into its stride. The brinkmanship in Washington over the lifting of the US debt ceiling exposed the fragility of the world’s economic powerhouse.
Even more disconcerting for the markets has been the euro zone’s debt crisis. The emergency meeting held in Brussels summit held on July 21st, which approved a further bailout for Greece and agreed new measures to prevent contagion, was supposed to have drawn a line in the sand, but did no such thing.
Yesterday, the first wave of panic emerged from Brussels. With markets plummeting everywhere, Commission President Jos Manuel Barroso fired off a letter to all European governments, demanding urgent action to prevent the crisis spreading from the periphery to the rest of the euro zone. Mr Barroso’s speech was astonishingly blunt.
He said that the markets were taking fright because of slow growth and the US debt fiasco, but “first and foremost” as of the “undisciplined communication and the complexity and incompleteness of the July 21 package”.
Such intemperate language is rare in the EU and will only increase anxiety. Mr Barroso’s frustration has clearly been fuelled by the tardy way in which national governments are ratifying the new rescue machinery.
He always believes that the EU’s rescue device, the European Financial Stability Fund, is not suitable to the task of assisting to Italy and Spain, respectively the third and fourth biggest economies in the euro zone and the latest countries to be targeted by the markets. Analysts say the yet-to-be ratified bailout fund of 440 billion should be increased significantly.
To add to the apprehension, the Barroso letter received short shrift from the German finance ministry, which said that member states should focus on passing the EFSF, and not to change it.
A ministry spokesman said it was not clear how reopening the debate only two weeks after the summit would help calm the markets, a point with which it is hard to argue.
With the single currency being tested to destruction, its members are struggling to work out which levers to pull – or indeed, whether the levers will actually work.
If only the uncertainty was limited to the euro zone. The US economy has just been hit by a slew of unsatisfying indicators, while Japan was yesterday forced to intervene in the currency markets to devalue yen in a bold effort to shore up its own ill healing.