Trust is the fulcrum on which market economies operate. Consumers trust manufacturers and service-providers and vice-versa. However, the most important is the trust that the bankers enjoy with the depositors. And it is this credibility that is fading away from Europe. Predictably, it began in Greece where households and businesses withdrew 34 billion euros from banks or 17 per cent of the total deposits in 2011-12. In the same year, deposits in the Greek, Portuguese, Irish, Italian and Spanish banks fell by 80.6 billion euros or 3.2 per cent of the total, while deposits in German and French banks rose by 217.4 billion euros or 6.3 per cent.
It is the process of an inexorable economic decline beginning 2009 that is taking its toll on society. Since 1999, when the euro came into being, a wave of optimism swept Europe. Money from cash-rich banks in Europe and the United States of America poured into Greece, Portugal, Ireland and Spain because they seemed to be safe, being euro members. It fuelled huge housing bubbles, large trade deficits and jacked up wages and prices. With the crisis of 2008, the flood of capital dried up causing severe slumps in the very economies that had boomed.
This overall economic gloom, which has been worsening rapidly, is extracting its ultimate price — the loss of trust in banks, a basic economic entity. Predictably, it is not just the rich and the business owners who have withdrawn money but a large chunk of ordinary people too. Though financially, the former group is far stronger, socially the latter is crucial. This loss of faith in one of the pillars of the economy is actually a social malaise. This is the crisis that has taken the form of withdrawal of deposits.
Greece’s choice of the pro-austerity coalition in the last election has warded off the immediate crisis for the euro. But the rally afterwards in the financial markets lasted barely an hour amid growing fears that Europe’s worsening debt crisis is about to engulf Spain and then Italy. Spanish bond rates reached 6.8 per cent in less than 24 hours of Spain getting 100 billion euros for saving its banks. Afterwards, they crossed the critical 7 per cent level in less than 48 hours. These are the rates that forced Greece, Ireland and Portugal to seek outside assistance. That very day, Italian bond rates crossed 6 per cent.
Evidently, the remedy — strict austerity — that Brussels and Berlin have been imposing so long even on economies that were slowing down (which drove them into deep recession), claiming that it would earn the ‘confidence’ of the financial markets, has failed disastrously. The much vaunted ‘confidence fairy’ remains elusive, private investment is just for maintenance while public investment is ruled out and welfare benefits are being pruned, thanks to the austerity condition of ‘zero deficit budgets’. It is a vicious cycle, harming everyone except the bondholders who are happy with low inflation. But for how long?
Will Brussels or Berlin relent? That is the million dollar question. Earlier, Spain had failed miserably to persuade the euro bosses to let it exclude the 100-billion-euro bank rescue fund from its national debt. Consequently, it got embroiled in debt more deeply. Immediately, financial markets demanded higher rates for its bonds. With all their rhetoric of realizing the ‘pan-European dream’, the creditor euro nations, which happen to be the stronger economies, refused to share the risks facing the Spanish banks even though the existence of the euro was at stake. Finally, Germany was persuaded to agree to a proposal of aiding the shaky euro banks directly from a eurozone bailout fund. So the euro is just being kept alive while joblessness hits 11.1 per cent and manufacturing slides continuously. Such are the achievements of liberalization and privatization.