Published in Business Spectator (Melbourne), 20 December 2012
In case you have not noticed it, the euro crisis is over. It must be because EU Commission President José Manuel Barroso, ECB President Mario Draghi and French President François Hollande all said so over the past six months.
IMF chief Christine Lagarde also claimed that a turn-around had been achieved in the euro crisis. Unfortunately, she did so when she was still French finance minister, back in January 2011.
This time, however, may indeed appear to be different. Since the ECB in mid-2012 signalled its preparedness to intervene without limits in order to save the euro, the urgency of the crisis has dissipated somewhat. The improvement can even be measured in a number of ways.
According to Munich-based economic research institute Ifo, the total bailout commitments given by eurozone members, ECB and IMF have trended down over the past six months.
The main reason is a slight easing of the Target2 claims within the eurosystem. The German Bundesbank’s claims peaked at €751 billion in August but have since fallen to €715 billion in November. However positive that looks, it nevertheless remains a year-on-year increase of €220 billion. And it is still a gargantuan figure regardless.
The end of the euro crisis also shows on Google’s search records. The Google Trends website is a useful tool for analysing what web users are interested in.
Unsurprisingly, searches for ‘euro crisis’ first spiked in May 2010 when the initial bailout package for Greece was agreed. Interest then subsided until the euro crisis freshly erupted with fears over Spain and Italy in November 2011. It ebbed away again until the Greek elections in June 2012, and is now at relatively low levels once more.
It is also possible to see the easing of the euro crisis in long-term interest rates across the eurozone, which have been falling since the third quarter of 2011. At the same time, government financial balances have improved so that deficits as a percentage of GDP have improved, if only marginally.
So now if Barroso, Hollande and other European politicians want to make us believe that the euro crisis is over, they can point to a few positive developments to support their claims. But does that really mean that 2013 will be the year in which Europe finally returns to business as usual?
Doubts over such a positive scenario are still appropriate – for at least four reasons. First, previous beliefs in ‘green shoots’ have all proved short-lived. Second, the current financial calm is not translating into a real economic recovery. Third, political uncertainties remain high throughout Europe. Fourth, the ECB’s pledge to save the euro at any costs may not be credible after all.
The first reason to doubt the euro optimists is the cyclical nature of the euro crisis. We have been there before, more than once. Over the past three years there has been no shortage of ‘breakthroughs’ in the crisis but none has lasted long. Europe’s monetary and sovereign debt crisis is a complex beast, as should have become clear by now. If it is ever solved, it will only happen over a long period of time, but most certainly not overnight.
Second, even if financial data indicate an overall improvement, this does not reach the ‘real economy’. It is rather bizarre that there is talk about an end of the euro crisis at the same time that the ECB has just cut its growth forecast for the eurozone.
The ECB’s previous forecast was for 0.5 per cent eurozone GDP growth, but earlier this month ECB President Draghi said it was unlikely to exceed 0.3 percent next year and the economy could even end up shrinking by 0.9 per cent. With such “growth” (if you can call it that), it is hard to imagine any substantial improvement in Europe’s public debt situation. If anything, Europe’s public debt mountain will grow further. If the Europeans are lucky, the only thing that might shrink is the rate at which their debt will grow – provided austerity measures work.
Third, there are enough complicating factors in European politics that will make crisis management more difficult in 2013 than it had been in 2012. Chief among them are general elections in two of the big eurozone countries, Italy and Germany. In both countries’ elections, the future of monetary union will play a key role. As I have argued before, in Italy it may even trigger a debate on the country’s continued euro membership (Berlusconi battles towards an Italian liberation, December 13), while the German elections will delay any meaningful debt restructuring for Greece (How Merkel’s fiction is writing Greece’s future, November 22).
Fourth, there remains a big question mark behind the ECB’s announcement to defend the euro at all costs. Not only does the ECB lack a mandate to defend the euro, let alone individual eurozone countries, from collapse. Indeed, it cannot even be ruled out that the legality of the ECB’s action will be challenged in the courts. But there is also a political reason why the ECB could be struggling to do what it has promised.
As long as consumer prices remain stable and inflation expectations low, it is easy for the ECB to promise defending the euro at all costs. That is because these costs are hardly visible. If however the ECB’s activism eventually manifests itself in price increases it will be much harder for Europe’s central bankers to deliver on their promise.
The European public, particularly in central Europe, remains highly sensitive about price stability, which puts a limit to the ECB’s room for manoeuvre. How likely is it, really, that the ECB can continue to bail out banks and governments once the inflation genie has escaped from the bottle?
For these reasons, it is premature to proclaim the euro crisis dead. And we have not even talked about the structural differences between eurozone members which are the root of the euro crisis and which have not changed substantially since the euro crisis first erupted. Neither have we considered the political implications of a Greek default which would cost central European taxpayers dearly. Least of all have we even mentioned the structural and demographic challenges hanging over the European economy like a Damoclean sword.
No, the euro crisis is not over. It was wishful thinking that got Europe into its crisis. But wishful thinking will not get Europe out of it.
On that rather pessimistic note, Merry Christmas to everyone. And a better New Year. Why can’t the euro optimists be right for a change?