Crisis over for the Euro – or is it?
June 13, 2014
Mark wrote the following article for the Daily Telegraph. It can be viewed on their site by using the link below
The results from May’s European elections are in and a damning verdict of ‘no confidence’ in the European establishment issued. Taking their seats in the new-look European Parliament is now a bewilderingly diverse array of sceptics and single-issue campaigners from all quarters of the EU, while the number of MEPs from Eurosceptic parties has doubled.
In spite of this, there is a palpable sense of relief at European political conferences these days. No longer are continental leaders lurching from one eurozone crisis summit to the next. The more discussion centres upon the EU’s political structure, the clearer the overriding message that ‘the Euro crisis is over’ – or at least the likelihood of any nation being forced out of the Eurozone has now passed. Whilst the West seems unable to rid itself of its addiction to printing money, the President of the European Central Bank, Mario Draghi, has at least provided confidence and stability.
It is even possible to detect a faint whiff of smugness as emerging markets wobble in response to the Fed’s cautious tapering of its money-printing bonanza. Not for Eurozone members the easy option of devaluation and inflation that the likes of India and Turkey are now pursuing to motor their economies out of trouble. Instead, they have gritted their teeth and endured tough austerity measures and supply-side reform. A leaner, more competitive Eurozone will be the result, with the currency union remaining firmly intact.
That, at least, is the official political line.
It is interesting to note that this euphoric declaration of victory is not even remotely shared by the German public, some 81% of whom in an April 2014 opinion poll reckoned the Eurozone crisis has further to run (only 7% believe it is ‘crisis over’).
For now, however, the financial markets intend to make hay. Even hapless Greece has proved able to get a bond issue away with investors helping themselves at Easter to €3bn of five-year bonds at 4.75 per cent. Much as we should all like to attribute this to the innate strengths of the Greek economy, the truth gives less cause for optimism. Nigh on six successive years of relentless recession and a reduction of over one-quarter in GDP suggests that this revival in fortunes owes more to confidence on the part of financial markets that fellow Eurozone members will prop up Greece regardless. Indeed if the economic fundamentals in Athens still look weak, the more likely scenario for Grexit is if the increasingly unstable Samaras coalition falls.
Now that a difficult set of European Parliament elections is behind us, it should not be forgotten that the German constitutional court has still not categorically endorsed the European Central Bank’s assertion that it is empowered to buy up unlimited amounts of government bonds issued by financially embarrassed Eurozone nations via the so-called Outright Monetary Transactions programme (otherwise known as Draghi’s ‘big bazooka’).
The argument that the programme might infringe the powers of the member states will become ever louder in German legal and political circles if and when a Eurozone default becomes imminent. Until now Mr Draghi’s pronouncements have been a (rather successful) confidence trick – the reason the ECB has not bought up a single Euro-denominated government bond is that is cannot do so.
Having refused to approve formally of the ECB’s new powers, the German constitutional court (always aware of the nation’s deep psychological aversion to inflationary money-printing) has passed the buck to the European Court of Justice. It is essentially playing for time, all too aware that the outright monetisation of Eurozone debt would appal the German public, while understanding that the programme is the invisible glue holding the currency union together. Without it, a new stage of the crisis is on the cards.
Smoke and mirrors have been similarly employed to cast a veil of opacity over the Eurozone’s troubled banking sector. For five years, the ECB has been quietly absorbing the toxic assets of members’ banks, doubling its own balance sheet in the process. We are told this will mean that the results of their next stress test, due in the autumn, will find them in rude health – a necessary conclusion for any banking union. Yet no one truly knows which banks are solvent or not, so deliberately obscure are their balance sheets.
In short, the Eurozone remains in a state of limbo. No member will countenance a return to sovereign independence, yet none has fully endorsed the further relinquishment of power required for a politically-integrated currency union.
All this at a time when gradual monetary tightening seems, in the US and China at least, to be the order of the day. In all likelihood we are only two or three years away from the end of this current ‘upward’ cycle of the global economy. Heaven help the Eurozone if this cyclical phase of the global economy comes to an end before austerity and macro-economic contraction in weaker European nations has ceased.
Nevertheless it is – as ever – wishful thinking to believe that economics, rather than politics, dictates the pace on matters concerning the Eurozone.
Within days of the Russian annexation of Crimea, the Polish Foreign Minister, Radek Sikorski, announced that his country wished to fast-track its application to join the Euro. No ifs or buts. It was made explicitly clear that this was a political decision designed to tie Poland more securely into the EU and German axis irrespective of its economic consequences. Indeed the resurgence of Russia in the region has also persuaded Lithuania to follow suit, having previously taken a critical stance of their Baltic neighbours, Estonia and Latvia, for having rushed headlong into the single currency.
As ever this does not augur well for the underlying economic stability of the Eurozone and the recent relative calm has allowed complacency to creep in. Events in Ukraine threaten to cast a long shadow over European affairs.
Needless to say here in the UK we can scarcely be said to be sitting pretty as the next phase of the Eurozone saga develops. We still undertake over two-fifths of our trade with the Eurozone. Indeed one of the main reasons we are apparently less exposed is that the UK economy, ironically enough given the domestic party political battles over immigration, has benefited from highly skilled migration from the weakest Eurozone nations which has helped accelerate our own economic growth.
Last autumn, the US Treasury expressed a fear that the Eurozone is now adding a permanent deflationary bias to the global economy, and this too has the potential to blow our own recovery off the rails. The public has been lulled into a false sense of security with relentless talk of the deficit being driven down and a narrative that public services have been slashed. In reality, public debt has grown rapidly throughout the coalition’s tenure, household debt remains uncomfortably high and the majority of public spending cuts will need to come after 2015. Deflation exported from the Eurozone will make tackling that debt a far harder task. While the debt mountain will remain the same, the income to service it is likely to fall.
Similarly, British wages might have to be held down longer in order to compete with falling continental labour costs. This is before even taking into account the potential for an increasingly-discontented Eurozone citizenry to throw up new, market-jangling political challenges. It may be that our careful husbandry of the British economy becomes largely irrelevant when faced with further continental shockwaves.
The European currency union has lived to see another day. But there is no room for euphoria. The Eurozone crisis is only dormant, with all too much scope for a fresh eruption.