One reason why the eurozone is sliding into ever deeper trouble is because its political and bureaucratic elites do not like, do not understand and have no wish to understand financial markets. This is an attitude embedded in European history and culture. Think of the 1793 Law of the General Maximum, an arbitrary attempt to fix prices at the height of the French Revolution. Or think of the social status attached for the past 150 years to being a state-employed soldier, teacher, office clerk or railway worker rather than a banker in Germany.
Since the world financial crisis started in summer 2007, the European Union’s authorities have tried to pin all the blame on “the markets” – often a codeword for the US and Britain, or at least their financial sectors. No one doubts that subprime mortgages, exotic financial instruments, reckless risk-taking and the like caused the trouble – but the EU took matters further. First, they said it was the fault of the hedge funds – all evidence to the contrary. Then the EU fired its popguns at sovereign wealth funds – although what they had to do with the crisis was a mystery to everyone outside Europe. Now it’s the turn of the reviled credit ratings agencies.
Consider a speech given on Wednesday by José Manuel Barroso, the European Commission president. In a text prepared for delivery at the European Parliament, he said: “We are all familiar with the expression ‘markets are testing this, markets are testing that’. Well, they are also testing regulatory authorities and democratic institutions. They must know that all of this is ultimately a test for themselves.”
Wow! Markets undermine democracy! Now there’s a headline. I am happy to report that, at the last minute, Barroso cut this passage from his speech – as well as another bit that denounced market reaction to Greece’s €110bn rescue package as “frankly irrational” and “unacceptable”. But it is revealing, to say the least, that someone in his Brussels entourage thought it appropriate to try and put language like this in Barroso’s mouth. And in any case, the final version of the speech singled out the ratings agencies for particular criticism.
What hypocrisy! The EU’s authorities might like to remember that between 1999, the euro’s launch year, and 2007 the financial markets, far from going on the attack, gave Greece the benefit of the doubt, valuing its debt at roughly the same level as that of Germany and France. Did the EU complain? As Eliza Doolittle put it in ‘Pygmalion’, not bloody likely. EU governments had, of course, merrily ignored the fact that Greece had lied about its public finances to get into the eurozone in 2001!
It was none other than Standard & Poor’s, the ratings agency, which was honest enough in the pre-crisis era to suggest that the politicians’ and markets’ confidence in Greece was misplaced. The agency downgraded Greek debt at a time when everyone else took the view that there could be no such thing as a “Greek problem” or an “Italian problem”, because all eurozone countries were supposedly converging towards some blissful state of eternal economic unity.
Now there is talk – not for the first time in recent years – of setting up a European credit ratings agency. Chancellor Angela Merkel of Germany favours the proposal, as does Michel Barnier, the EU internal markets commissioner. The idea is to ensure that sovereign debt is “appropriately rated”.
Well, here we go again – it’s the same old hostility to the markets. Don’t Europe’s leaders get it? If a European credit ratings agency is established and there is even a hint that its decisions are influenced by political pressures, it won’t possess and it won’t deserve the slightest respect in the real world of real investors who handle real people’s money – yours and mine.
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