Eurozone crisis: Failing the Healey test

Guardian
Editorial
August 2, 2011

There are many indicators of a country's financial distress: from the rate of interest demanded of a government's bonds to the number of insurance policies taken out against a country defaulting on its loans. But one of the simplest and starkest and most public is what you might call the Healey test.

On 28 September 1976 Denis Healey, then chancellor, was heading to Hong Kong for a meeting with fellow finance ministers. But with the pound, the markets and public confidence in the government all in freefall, he was forced to call off the trip just yards short of Heathrow, return to the Treasury and call in the IMF. This was one of the defining stories of the period: a crystalline image of a government that had been overtaken by events and was no longer wholly in charge. By Christmas of that year Mr Healey had brought out an emergency budget full of massive spending cuts.

Spain's government faced its own Healey test on Tuesday. The prime minister, José Luis Zapatero, was meant to go on holiday to the Doñana national park in southern Spain, but postponed his trip "to follow more closely the movement of economic indicators". Or, put more simply, to keep a close eye on the meltdown in the country's financial markets. The interest rate investors demanded on a 10-year loan to Madrid touched 6.46% – the highest since 1997 and over four percentage points more than markets demanded of the German equivalent. A similar story prevailed for Italian government debt, where the yield on 10-year BTPs surged to 6.25%, the highest since the end of 1997 – a period when investors were still speculating on whether Rome would be allowed to board the euro.

From this disorder, three conclusions follow. First, the past month's focus on Washington as the locus of the sovereign-debt crisis has now shifted back to Brussels. Second, the fact that it now takes in Madrid and Rome could mean the euro fiasco is about to escalate to a whole new level. Greece and Portugal are, after all, economic specks compared to their bigger neighbours in southern Europe; if the contagion really is spreading, then the hundreds of billions of euros ponied up to bail out stricken countries will soon shade into talk of trillions. Finally, the turmoil in markets indicates that if the heads of the powerful eurozone states – Angela Merkel, Nicolas Sarkozy and all the rest – thought that last month's deal to prop up the single currency had done the trick, they were sorely wrong.

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