In the short term, it looks like the new deal announced to support troubled eurozone economies might work. The $750 billion in loan guarantees has seen stock markets around the world and oil prices rise sharply. That is good news.
But, in the long term things are still ominous because the package doesn't do anything about the simple fact that the eurozone and other European countries like Britain are running deficits that are too big and have too much debt. Wolfgang Munchau, in the Financial Times, asks "How can a loan guarantee solve a problem of excessive indebtedness"?
Stephanie Flanders says:
"Put simply: it tackles the symptom of the problem, by making it
easier for the high borrowing countries in the eurozone to pay their
By itself, the deal doesn't materially change the amount that
eurozone governments will have to borrow over the next few years. And it
doesn't even begin to talk about addressing the reasons why countries
like Portugal are borrowing so much in the first place."
The Bank for International Settlements report that I blogged about before is relevant here. If serious action isn't taken to put the public finances on a more sustainable footing then European economies are heading for disaster and no amount of bailing each other out will save them.
Another potential problem for us is that if markets feel able to park their concerns about the eurozone for now, attention might turn to our public finances. We borrowed more in 2009 than any European economy that isn't either already making big cuts (Ireland) or being bailed out (Greece):
It looks like our political class are more interested in witless navel-gazing about electoral reform; PR, AV, STV, AV+, PR-squared, etc. etc. Voters are much more sensible and ranked the economy and dealing with the debt as the two issues that should be the top priority for coalition negotiations, according to a Politics Home poll.
The economy is recovering but if the markets come to the view that our politicians aren't serious about dealing with the deficit then that could be undone very quickly. The stakes are incredibly high and what we're seeing in the negotiations at the moment isn't encouraging.