Lars Nyberg, one of the deputy governors at Sweden’s Riksbank, is a frequent critic of the eurozone authorities’ handling of the crisis. He has also been remarkably prescient.
So, what do the Riksbank’s minutes of its 6 September meeting, out today, reveal about what Mr Nyberg thinks will happen next?
According to the minutes, the deputy governor “did not believe one could look forward to a calm and stable autumn in the financial markets in Europe.”
Why so pessimistic?
For one, because investors believe officials’ fiscal and monetary policy armoury had largely been exhausted and could not be used “credibly” to counter a slowdown.
And, as the deputy governor had foreseen back in July, confidence in the European banking system had fallen parallel to confidence in the political system.
Yet despite this “vicious circle”, the political will necessary to reverse it remained lacking.
Greece does not appear able to manage the commitments required for the next payment from the IMF and Europe. Finland has negotiated collateral for its share of the previous payment and this has irritated other contributors and further increased unrest on the market. The yield on two-year Greek government securities is now over 50 per cent, which of course reflects an increasingly strong expectation of a Greek payment default.
The politicians are no longer denying that the Greek national debt needs restructuring, which is positive. But powerful measures are needed to restore market confidence. There are many proposals for such measures, including the issue of Eurobonds. However, what all of these proposals have in common is that they assume an increase in economic commitments, primarily from Germany. And there does not appear to be any political sympathy for this among German voters. The European way of muddling through the problems has increasingly lost credibility.
All of which meant that it was “not impossible that the European crisis will enter a new phase in the near future.”
Last week’s issue of “The Economist” reported on US investors who said that “it is easier to refrain from all European investment right now than to explain why the ones I chose are not high risk”. If this view spreads, the crisis will become acute. How to resolve it is a different story.