International

Two more weeks and then the European Parliament goes into recess. In the last few years, during the recess, there has often been unrest surrounding the euro. The same could happen again this year. The crisis at the Portuguese bank Espirito Santo appears to be the first sign. As we have been saying for years in the SP, the apparent calm around the euro is deceptive. A great deal is still brewing. Whatever else, I won’t be straying far from mobile phone and Internet during the summer recess.

The Banco Espirito Santo isn’t such a big bank and the fact that it has now fallen into difficulties ought not in itself to have any major consequences. Yet the interest on Portugal’s long-term loans has risen and prices on the Portuguese stock exchange have fallen by around 4%. So the eyes of many financial institutions are turned on Portugal. If anything should go wrong there, this would provoke a rapid chain reaction in other weaker Eurozone countries.

The fact that the crisis at one bank, and not a particularly large one, can have such an effect can be explained with reference to the imbalances in the Portuguese economy as a whole. If the Portuguese economy did climb just a little way out of the pit last year, at least as far as growth rates are concerned, this year could again be one of contraction. The national debt stands at 129% of GDP, as against the European ‘norm’ of 60%. This means that the Portuguese government will meet difficulties should it have to rescue a bank on its own.

Decisions which have been taken regarding a banking union were supposed to help Portugal, but in practice things are a bit more intractable. The banking union is based on the idea that banks must help each other and that only after this should the state step in: first the state where the bank is established, and then if necessary other member states. This could work in the case of a small bank such as Espirito Santo, but first of all the banking union’s so-called ‘resolution fund’ have not yet been set up, and secondly there are in southern Europe a large number of banks of which it can be said that their position is at best doubtful. The banking union is not designed to cope with the collapse of numerous banks all at the same time. The stronger Eurozone countries would then have to dip into their pockets and find the necessary, and they would feel, understandably, that they have already paid enough in propping up their own banks.

So the situation remains precarious, which is why investors are once again losing confidence, as is shown by the fall in the index which measures this. This is no ripple in an otherwise calm body of water, but rather a sign of disquiet. I wish I could write a bit more positively about the Euro, as we also said during the European elections. Everyone would rather ignore the imbalances in the eurozone than recognise them and provide the means for a soft landing. The next few weeks will tell us whether a period of euro-unrest is going to break out. If so, it wouldn’t surprise me.