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.
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Dr Harwich is of course right. The "victory" Barroso, Draghi, Hollande and others are talking about is nothing but wishful thinking. The fundamental flaws of the euro are still there, and nothing of real importance has been done to remove them. This is just another case of calm before another storm ...