Treacle Economy a Better Alternative to Greece

Three months ago, I predicted that the EU would use a fudge to save Greece.
They would use article 122 of the Lisbon Treaty, which allows the EU to bail out states with approval from a qualified majority of the European Council, if the state is "seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control." This is precisely what the EU has now done.

So the EU has decided that Greece is a natural disaster which is beyond its own control. The German constitutional court may not be so happy with this huge expansion of EU power, and cross subsidy from one nation to another. It is a safe bet that the problem has not been solved. The crisis has simply been postponed. Watch Portugal, then Spain and Italy closely. Greece may well turn out to be just the overture before the main act.

At the risk of hubris (traditionally followed shortly by nemesis), it is time to look back at other predictions I made for the year and see how they are progressing.

At the start of this year I predicted that 2010 would be a football manager's year: a year of two halves. In the first half we would see the economy pumped up as hard as possible with government spending in a desperate attempt to secure recovery (of Labour's electoral fortunes). And the second half of the year would be like treacle: very sticky indeed.

So far, so good. There has been a recovery, of sorts. The stockmarket and housing markets are booming. So why the Cassandra like prophecies of doom? Partly, because I have lived in post Japan bubble and we are, if anything, in a worse position than they were. Here's why:

• Government has been spending £4 for every £3 of tax received. It has been living on the never-never and the day of reckoning is at hand: if we are to avoid going the way of Greece, government spending will have to come down.
• The banks are still sitting on vast but unknown amounts of unrecognised bad debts, which is why they do not want to lend. They need to make huge profits (out of you and me) to rebuild their balance sheets fast before they resume serious lending.
• The stock market is doing just fine, until you realise that the US stock market is at levels which have not been seen before the dot com crash of 2000 and the Wall Street Crash of 1929. It will not take a major shock to burst that bubble.
• House prices are doing just fine as well. The UK housing market is just 15 percent off its 2007 peak. Generally, the view from the peak is great but the journey is all downhill. Enjoy the moment.
• Interest rates are at all time lows, which conceals a multitude of sins. If interest rates go up housing affordability and house prices will go down and we will get to listen to the sound of another bubble bursting. Meanwhile, the government will have to pay more to foreigners to finance its borrowings: at least Japan could rely on low cost domestic savings market and so it is not at the mercy of international investors.

The one saving grace is that we are not in the euro. We can let our currency slide, which will make imports more expensive but exports cheaper: that will benefit local jobs over foreign jobs. We have a narrow escape route which the euro zone does not.

We may be looking at a treacle economy, but at least that is better than the lead balloon economy of Greece and possibly Spain (20 percent unemployment and rising), Portugal and Italy.

(Pic: endiaferon cc2.0)