WORLD ECONOMY IN CRISIS!

I feel that I ought to make some ill-informed comments about the economic crisis currently sweeping the world. There were interesting developments last week, when my own government announced that the Irish state was going to guarantee all deposits in Irish banks. Apparently this decision was made because there was a real likelihood of a major Irish financial institution going bust, something that would have had catastrophic effects for confidence in our economy. The government guarantee does seem to have restored confidence in the Irish financial system, even though some people are muttering about moral hazard and that kind of thing. Other people are complaining about the state bailing out bankers, though in this case it is more that the Irish state is becoming a deposit insurer - assuming that no bank actually goes to the wall (a big assumption, perhaps), this scheme looks like being quite a money spinner for the state, as the banks will have to pay something like 0.1% or 0.2% of their deposits to the state to be covered.

Greece also instituted a state guarantee of deposits last week. All of this caused some consternation in other European countries, where people complained about how a European-wide solution should have been sought. I think that is easy for them to say, but any kind of pan-European plan would have taken ages to bring together and would not have been easy to create, given the differing opinions on what was to be done. Some countries apparently did not even feel that anything needed to be done; German leaders in particular were reported as feeling that their banks were totally sound, and so did not want them to be entangled with a plan to help stupid banks in other countries. It is hard to know how serious and pressing the crisis in the Irish financial system was last week, but it really does sound like the authorities here could not wait for a European agreement to come into being.

Ireland and Greece did nevertheless find themselves in trouble with their European neighbours. British financial institutions feared that their deposits would disappear off to Irish safe havens, while EU figures talked of the state guarantees as being anti-competitive. For good or ill, however, it looks like the rest of Europe will find themselves having to follow the Irish example. Yesterday German leaders denounced the Irish and Greek move and agreed that there should be no more unilateral moves. Today they found that their banks are as shite as everyone else's, and the German government has announced that they are going to guarantee German bank deposits. The loss of the German middle class' savings in the 1920s is always seen as paving the way for the rise of the Nazis, so presumably Chancellor Merkel wanted to avoid anything similar happening today. Commentators reckon that it is inevitable that Britain will follow suit, with other European states having no choice but to bring up the rear.

Who knows what difference this will make in the long run? There is always a smoke and mirrors aspect to banking and insurance. European states do not even remotely have the funds to cover all their banks' deposits, should all of the banks fail simultanaeously. So as long as no banks, or only a few, fail then we should all be grand. Still, I have read predictions in the Financial Times that the European economy is likely to tank even worse than the US one, due to lower flexibility and stuff like that. We'll see.