Forget Achilles heels, euro zone's weakness is unleavened

PUBLISHED : Sunday, 20 May, 2012, 12:00am
UPDATED : Sunday, 20 May, 2012, 12:00am


Hong Kong's stock market yesterday suffered its biggest loss this year, with more than HK$500 billion wiped off the value of shares, as institutional investors offloaded stock on fears Greece may have to give up the euro.

SCMP, May 17

My colleague Harry Harrison, our cartoonist, was up to his usual biting standard the other day with a cartoon of an ancient Greek warrior slashing the Achilles heel of a yelping European fat cat.

It fits the circumstances entirely, provided we make that fat cat the European Central Bank (there are few other cats that fat in Europe these days) and provided we note that Harry's Greek warrior was also on the chubby side and could do with some fat trimming himself.

Greece has itself to thank for its troubles. It has for too long paid its numerous civil servants too much for tasks of too little use to the citizenry, and one reason this misuse of resources continued as long as it did is that the Greek citizenry did not pay for it.

The corporations and citizens of other European countries picked up the bill through their deposits in banks that then advanced the money to the Greek government. Greece relied on foreigners to run a fiscal deficit on its operating budget, leave alone anything on the capital side, and that sort of fiscal irresponsibility is just not sustainable.

It is a stark choice these people now face. Comply with German demands for austerity as the price of rescue loans and suffer a painful drop in living standards, or defy Germany, leave the euro and suffer even more badly from the crash that will follow. I pity them, but this does not get around the fact that their woes are self-inflicted.

I don't have much better to say for the European Central Bank. The reputation of any central bank relies on its commitment to the disciplines of a sound currency. The ECB was put to the test as the Greek crisis unfolded and as the fiscal weakness of Italy, Spain and some other member countries of the European Union became apparent.

Would it tell these governments to set their own houses in order? Would it tell them that the ECB was not a development bank or a rescue agency or a guarantor of European living standards? Would it tell them that a sound currency is one of the legs on which any financial recovery must stand?

No, it would not. At the first push it fell over and its discipline vanished. It began shovelling out money in huge quantities to all European commercial banks that came calling so that it could delay a crisis it was afraid to face. This was the sort of remedy that might have been cooked up in Athens. It will likely have a Greek-style result.

I am not a big believer in the euro. I have always wondered whether it was given the underpinnings it needed and I am increasingly of the view that it was not. The Greek crisis may indeed have found the Achilles heel of Europe.

But I hear you. Who am I to make such sweeping pronouncements? How much weight should the opinion of a know-it-all journalist be given? Is the final say on European financial structure to come out of Hong Kong?

In answer to the first question, I swing as much weight in euro matters as the amount of euro I can sell or buy and I am reducing my euro holdings. What are you doing?

And, yes, Hong Kong is an excellent place for perspective on European fiscal difficulties. Our government runs a consistent fiscal surplus, not deficit, and its net fiscal savings are approximate to 70 per cent of the size of the economy.

Our central bank (or what passes for one) has also proved it can stick to its monetary disciplines. The Hong Kong dollar came under fiercer attack in 1998 than the euro is ever likely to endure and we all took the pain of the resulting deflation over the following five years.

Thus, if you folks in Brussels want to know how it's done and what it feels like, come talk to us.

All of which is only to say that if it was really trouble in Europe that made the Hang Seng Index drop more than 600 points in a single day, then I expect it to bounce again pretty soon. Europe is not quite that close to us, nor European difficulties that contagious.

Slowdown in China is a different matter.