We all remember the old schoolboy joke: “What’s a Grecian Urn?”. Answer: “About a hundred Drachma a week”. There’s an up-dated 20th century version of that: “What’s the capital of Iceland?”. No, not Reykjavik. The answer is “A couple of hundred Krona” — if you’re lucky!
Of course today’s Grecian, if he’s in work, will be earning euros, not Drachma. Greece adopted the euro in 2002, and for a while all seemed well. That is, until the current crisis hit. If the world’s money markets have any reservations about the EU’s monetary union, it will show up as a spread between the rates on government bonds between different euro member-states. The spreads are measured in “basis points”, which are simply a hundredth of a percentage point — so if we’re comparing say 5% with 5.5%, that’s 50 basis points.
Some of our financial commentators got rather excited when the spread between Italian and German bonds reached 30 basis points, and started muttering darkly about threats to the future stability of the currency. Then a couple of weeks back, well into the crisis, that figure had reached around 90 points. Scary. Today as I write, the Italy/Germany spread has reached 100 basis points. But there is worse news from Greece. The spread on 10-year bonds between Greece and Germany is at a record 123 basis points — nearly one and a quarter percent. Not so much a spread as a chasm.
Greece is hard-hit by the slow-down in shipping and freight rates. Its public debt is a whopping 92% of GDP. Its current account deficit this year is 15%, the highest in the euro-zone (and five times the Maastricht requirement of 3%). I am indebted to Ambrose Evans-Pritchard for his report on this issue in today’s Telegraph. He remarks “The markets are now clearly singling out (Greece) as the most vulnerable member of the currency bloc”. There, and I’d been expecting Spain or Italy to get the old euro heave-ho first.
Ambrose quotes Michael Klawitter of Dresdner Kleinwort: “We are no longer having a theoretical discussion about the viability of monetary union. People are really concerned for the first time”. Especially, we can take it, the Greeks. Like Gordon Brown’s tripartite regulatory system, the EU’s monetary union worked tolerably well in good times (although even then the strains were showing). Now that the storm has broken, the continuing survival of the monetary adventure is in doubt. The cracks are widening. Thank heaven we never joined the euro.