Published in Business Spectator (Melbourne), 15 August 2013
Rejoice! The European economic crisis is over (again). After six consecutive quarters of contraction, the eurozone impressively rebounded from its longest ever recession. In the three months to June, its economy grew by a whopping 0.2 per cent.
Yes, you read right: 0.2 per cent is all it takes nowadays to count as good news from the eurozone. It is enough to make some analysts and commentators wax lyrical about “green shoots” and European Central Bankers and eurocrats to congratulate themselves for their all-so-successful crisis management.
They should celebrate while the adrenaline rush of this unexpected European boom lasts, because before too long, the old and well-known problems of the euro crisis will be back on the agenda. A quick glance at Greece’s debt dynamics makes it clear how premature any sighs of relief are.
It was the Bundesbank (who else?) that once again played the part of the malcontent. In a memo prepared for the federal finance ministry in Berlin and the International Monetary Fund, Germany’s central bank came to a sobering assessment of Greece’s debt dynamics. The document was leaked to newsmagazine Der Spiegel, which published excerpts in its current issue.
According to Der Spiegel, the Bundesbank paper states that at the very latest, a new bailout for Greece will be needed in early 2014. The central bankers also criticise the troika’s recently released funds for Athens and speculate openly that political considerations may have been the reason for these payments – a thinly veiled reference to the forthcoming German elections. The risks of such assistance to Greece remained extraordinarily high, while actual progress in implementing economic reforms was not satisfactory, the central bankers wrote.
The Bundesbank is correct in its assessment. Since the beginning of the bailout program, Greece has received more than €200 billion ($A291.28 billion). Despite this massive support and a first haircut on its debt, the dynamics of Greek debt have not improved. The International Monetary Fund expects Greece’s debt-to-GDP ratio to reach 167 per cent this year. Meanwhile, the Greek economy contracted strongly, pushing up the unemployment rate to 27.6 per cent.
On this trajectory, the country will remain dependent on international assistance for a long time, certainly beyond 2014 and practically as long as it is part of the eurozone. It is simply not conceivable how Athens would be able to reduce its debt burden to a level at which it could service it without ongoing cash transfers from the international community. It is quite plausible that the only way to solve this problem will be another haircut — never mind that this has been ruled out time and again.
It was only last week that Germany’s business minister Philipp Rösler declared in an interview why a Greek haircut was unnecessary. However, his explanation was telling. Rösler said that “such a step would endanger renewed confidence in the eurozone and take reform pressure off those countries in crisis”. In other words, even though Greece may need a haircut, this could just remind markets that the euro crisis had never actually been away. And it would make reforms even more difficult than they are already.
In a way, Rösler’s remarks were an admission that Greece is still a time bomb that could detonate at any time and reignite the euro crisis.
But this is not the only reason why the overall growth rate for the eurozone should not be over-interpreted.
Even if the eurozone economy as a whole managed to record a very modest growth rate, this cannot obscure the fact that Europe’s imbalances remain unresolved. Without a German quarterly growth figure of 0.7 percent, the eurozone would have remained in recession territory. So the minuscule eurozone growth turns out to be unevenly spread between euro-core expansion and euro-periphery contraction.
Even ignoring the festering Greek crisis and the eurozone imbalances, there are many other structural and political problems around Europe which should dampen any “green shoots” optimism. In the short term, there are depressingly high unemployment rates in many eurozone economies. The kinds of growth rates that Europe might record, on the most positive assumptions, will not be enough to substantially reduce unemployment from these levels. Inasmuch as Europe leaves recession territory, it will be an economic recovery that does not translate into jobs growth. It will not feel much like a recovery at all.
The political situations in many eurozone countries also remain fragile. Following the criminal conviction of former prime minister Silvio Berlusconi in Italy, there are question marks over the stability of the Italian government, which Berlusconi’s party so far supported. France’s President François Hollande is deeply unpopular and has been unable to start a much needed economic reform process for his country. The Spanish government of Prime Minister Mariano Rajoy is struggling to survive a corruption scandal. At least Rajoy is managing to deflect from his domestic problems by waging a diplomatic war with Britain over the status of Gibraltar.
In these circumstances, it takes rose-tinted glasses to believe that the euro crisis was now finally over and dealt with. Europe’s fundamental debt data remain shocking, its unemployment situation tragic, its growth unbalanced and its politics complicated.
The best one can say about the euro crisis at present is that it is on hold, contained by the ECB’s promises to defend the euro and some stop-gap measures to keep financial institutions and countries solvent until the German elections.
Before you consider believing claims about the allegedly ended euro crisis, ask yourself a simple question: Which, if any, of the issues that initially triggered the euro crisis has actually been satisfactorily addressed?
Don’t worry if you can’t name any such issues. I can’t think of one, either.
