Blog Post

Is the Euro Crisis Over?

Financial crises tend to start abruptly and end by surprise. Three years ago, the euro crisis began when Greece became a cause for concern among policymakers and a cause for excitement among money managers. Since the end of 2012, a sort of armistice has prevailed. Does that mean that the crisis is over?

By: Date: April 20, 2013 Topic: Macroeconomic policy

Financial crises tend to start abruptly and end by surprise. Three years ago, the euro crisis began when Greece became a cause for concern among policymakers and a cause for excitement among money managers. Since the end of 2012, a sort of armistice has prevailed. Does that mean that the crisis is over?

By the usual standards of financial crises, three years is a long time. A year after the collapse of Lehman Brothers in September 2008, confidence in the United States’ financial system had been restored, and recovery had begun. A little more than a year after the 1997 exchange-rate debacle triggered Asian economies’ worst recession in decades, they were thriving again. Has the eurozone, at long last, reached the inflection point?

Many battles were fought in the last three years – over Greece, Ireland, Spain, and Italy, to name the main ones. The European Union’s financial warriors are exhausted. Hedge funds first made money betting that the crisis would worsen, but then lost money betting on a eurozone breakup. Policymakers first lost credibility by being behind the curve, and then recouped some of it by embracing bold initiatives. Recent data suggest that capital has started returning to southern Europe.

The current change in market sentiment is also motivated by two significant policy changes. First, European leaders agreed in June 2012 on a major overhaul of the eurozone. By embarking on a banking union, which will transfer to the European level responsibility for bank supervision and, ultimately, resolution and recapitalization, they showed their readiness to address a systemic weakness in the monetary union’s design.

Second, by launching its new “outright monetary transactions” scheme in September, the European Central Bank took responsibility for preserving the integrity of the eurozone. The OMT program was a serious commitment, and markets interpreted it that way, especially as German Chancellor Angela Merkel backed it, despite opposition from the Bundesbank. Moreover, Merkel visited Athens and silenced the voices in her coalition government who were openly calling for Greece’s exit from the euro.

Unfortunately, however, there remain three reasons to be concerned about the future. For starters, politics lags behind economics, which in turn lags behind market developments. Sentiment on trading desks in New York or Hong Kong may have improved, but it has deteriorated on the streets of Madrid and Athens.

Indeed, the economic and social situation in southern Europe is bound to remain grim for several years. As things stand, all southern European countries are facing the prospect of a true lost decade: according to the International Monetary Fund, their per capita GDP will be lower in 2017 than it was in 2007. As long as sustained economic improvement has not materialized, political risk will remain prevalent.

Political upheaval in any of the southern countries would be sufficient to reignite doubts about the eurozone’s future. Furthermore, French competitiveness, and the gap between its performance and that of Germany, is a growing cause of anxiety.

The second reason to worry is that there is limited consensus in Europe on what, exactly, is needed to make the monetary union resilient and prosperous again. Banking union is a positive development, but there is no agreement on additional reforms, such as the creation of a common fiscal capacity or a common treasury.

In particular, northern Europe continues to interpret the crisis as having resulted primarily from a failure to enforce existing rules, especially the EU’s fiscal-stability criteria. Southern Europe is more inclined to view the crisis as having resulted from systemic flaws. Furthermore, northern Europe regards austerity as the mother of all reforms, while southern Europe fears that governments may not have enough political capital to do everything at the same time.

Finally, the last three years have revealed a clear pattern in the management of crises: Almost no decision results from serene deliberation, with most taken under financial-market pressure in an attempt to avoid the worst. Each time the pressure abates, plans for policy reform are put off – an attitude best captured in Merkel’s famous ultima ratio: action is undertaken only if it is indispensable to the survival of the euro. In other words, Europe displays a strong sense of survival, but not a strong sense of common purpose.

None of this means that the euro will collapse. The widely held conviction that letting the monetary union break up would amount to collective economic suicide provides a strong motivation to weather storms and overcome obstacles. Moreover, the results achieved so far may well prove sufficient to contain risks in the near future, while plans for a fiscal capacity, common bonds, and the creation of a European treasury are still being sketched. So, in practical terms, the difference between reforms that could be implemented and those that are being or will be implemented is less significant than it seems.

But, by consciously eschewing discussion about which reforms would make membership in the eurozone less hazardous and more beneficial for all, European leaders are missing an opportunity to signal that the euro is a stepping stone toward a prosperous, resilient, and cohesive union; and they are missing an opportunity to signal that the harsh economic adjustment that continues to dominate the policy agenda for much of the continent is not an end in itself.

Read more at http://www.project-syndicate.org/commentary/the-euro-crisis-and-european-reform-by-jean-pisani-ferry#hHVRPhGuR0piBXPh.99 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Date: November 24, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Opinion

European governance

Growth and inflation after the pandemic in the EU

Countries hit comparatively hard during the financial crisis, helped also by domestic and European policies, are bouncing back from the pandemic faster than their peers.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceFrench Senate

European Union countries’ National Recovery and Resilience Plans: A cross-country comparison

Testimony before the Economic Affairs Committee of the French Senate.

By: Simone Tagliapietra Topic: European governance, French Senate, Macroeconomic policy Date: November 12, 2021
Read article Download PDF
 

Policy Contribution

European governance

Next Generation EU borrowing: a first assessment

The Next Generation EU programme is radically changing the way the EU finances itself and interacts with financial markets. This paper assesses the first design decisions made by the European Commission and the issuances that have taken place so far. It also outlines the potential risks and opportunities linked to this upgrading of the EU borrowing.

By: Rebecca Christie, Grégory Claeys and Pauline Weil Topic: Banking and capital markets, European governance, Macroeconomic policy Date: November 10, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceEuropean Parliament

The New Euro Area Inflation Indicator and Target: The Right Reset?

Testimony to the Monetary Dialogue Preparatory Meeting of the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas Topic: European governance, European Parliament, Macroeconomic policy Date: November 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Eric Bartelsman, Maria Demertzis, Peter Grasmann and Laurie Mayers Topic: Macroeconomic policy Date: November 9, 2021
Read article
 

External Publication

European governanceEuropean Parliament

The new euro area inflation indicator and target: the right reset?

In-depth analysis on the European Central Bank's revised inflation target prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas and Catarina Martins Topic: European governance, European Parliament, Macroeconomic policy Date: November 4, 2021
Read about event More on this topic
 

Past Event

Past Event

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke, Francesco Papadia and Massimo Rostagno Topic: Macroeconomic policy Date: November 4, 2021
Read article Download PDF
 

Policy Contribution

European governance

COVID-19 financial aid and productivity: has support been well spent?

While support schemes during the pandemic were not targeted at protecting ‘good’ firms, financial support mostly went to those with the capacity to survive and succeed. Labour schemes have been effective in protecting employment.

By: Carlo Altomonte, Maria Demertzis, Lionel Fontagné and Steffen Müller Topic: European governance, Macroeconomic policy Date: November 4, 2021
Read article Download PDF More on this topic
 

Working Paper

Does money growth tell us anything about inflation?

Attention should be paid to a possible sequence of negative events: if inflation would start to be volatile and money growth remains high, efforts to control inflation could be undermined.

By: Leonardo Cadamuro and Francesco Papadia Topic: Macroeconomic policy Date: November 4, 2021
Load more posts