Sharing the economic pain

There is an interesting piece in the Financial Times today reporting on the scale of the debts that have built up in post-Communist Europe. (Read it here.) Greece may be the first EU member state to hit financial problems, but it will not be the last.

In countries such as Latvia and Hungary, a lot of people borrowed money in euros to buy property. They may have thought of themselves as property investors but, whether wittingly or not, they also took on a sideline as players in the foreign currency markets. The lower interest rates charged on euro mortgages seemed to make the investment model worthwhile, but those euro interest rates were lower for a reason.

With the explosion of the property bubble and collapse in their domestic currencies, those investors are now left with apparently unpayable debts. What can be done?

If there is a simple default, the pain passes to those banks that lent the money, many of whom are Swedish and Austrian. That way, contagion spreads throughout the EU.

The alternative is that the pain must be spread. The rogues and fools must not profit from their mistakes, but the aim of policy should be to unite Europe, not to divide it.

I have remarked before that the collapse of the free market fundamentalist economic model in the last two or three years is as significant an event as the collapse of Communism and the fall of the Berlin Wall. It requires the same creative efforts that Robert Schuman spoke of in his declaration 60 years ago.

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John Kay compares the business practices of people who seek to make frequent small gains while risking occasional large losses with drivers who come up too close behind you on the motorway. They too are trying to save a few seconds here and there on their journeys and don’t properly take account of the consequences when their risky behaviour goes wrong.