Reckless Europe Is More Than reckless America

Once and for all, let us nail the lie that the global credit crisis was basically a US sub-prime property bubble that went wrong, and that Europe was merely an innocent bystander hit by shrapnel.
This is the property bubble chart on Page 12 of the IMF’s latest report (Article IV) on France. If you read the whole report –  note the horrendous decline in French export share. But that is another story.

As you can see, France had the most extreme price rises from 1997 to 2009, followed by Spain and Italy some way below.

The Anglo-Saxons were more moderate. The US bubble was tame by comparison (measured by price: inventory overhang is another matter) and has largely corrected. This the American way, a short sharp purge. The Club Med bubbles have not corrected, by a long shot.

The UK is sui generis. Chronic lack of construction (nimbyism, and draconian planning laws) means that the equilibrium price of houses is higher. There has not been a large glut of unsold properties.
This is not to condone Anglo credit excesses in the Greenspan era of silly money. But the fact is that real interest rates were as low – or even lower (Spain, Greece, Italy, Ireland) – in the eurozone than in Greenspan-land for much of the boom.

Indeed, the eurozone debt bubbles were larger in aggregate, if you add sovereign bubbles to household credit bubbles, and corporate loan bubbles (Spain) –and if you add euro-peggers (Denmark, Baltics, Balkans, etc) and dirty-floaters (Hungary) in Eastern/Central Europe where countries acted like eurozone states because they were “pre-ins”.

No doubt there are many other layers to this. We all know that Chinese and Asian reserve accumulation depressed global bond yields, mispricing credit at the long end and making it easier for Greece to borrow globally at 28 basis points over Germany, and Spain to borrow at 4 basis points over Bunds. (Ah, those halcyon days). We all know too that Japan’s zero-rate carry trade leaked massive amounts of liquidity into Icelandic, Hungarian and British assets. Hence, a mega-mess.

However, Europe generated its own home-grown bubble when the ECB let the M3 money supply grow at 11pc, failed to meet its inflation target ever for a decade, and poured petrol over the Club O’Med flames.

Judging by comments from policy-makers in Germany, France, Italy, (I exempt the excellent Bank of Spain and Ireland’s central bank) it is clear to me that the political elites cannot seem to understand what has happened.

For top German ministers to continue blaming this on the US after all that has since happened indicates to me that they are either remarkably ill-informed or psychologically unhinged, or perhaps they are just country bumpkins.