MoneyWeek has been around long enough to see several big trends recur. Most of them have been fascinating to cover. But one key theme of the past decade fills me with dread, because it was like watching a slow-motion car crash: the euro crisis. It may now be making a comeback.
A sub-optimal currency area
Many analysts, however, pointed out that there had never been a successful single currency without a single government, and that the euro was far from what economists call an optimal currency area. The basic idea is that groups of structurally similar economies, who often tend to experience similar business cycles, are best suited to sharing a currency. A similar approach to money management helps too, as it pre-empts fights about any joint budgets and potential debt issuance.
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Benelux, Germany and Austria would arguably be an optimal currency zone: wealthy manufacturing-based economies with a shared instinct for sound money. What we got instead, of course, was northern Europe plus the inflation-prone south’s less healthy balance sheets. The prospect of sharing a currency with people who can’t budget, and would probably need a bailout at some stage, unnerved many northern Europeans, but such objections were steamrollered by the integrationist tide.
When the financial tide went out after the crisis, investors’ fears over the sustainability of the southern countries’ debt duly proved justified and bond yields soared. Since bond yields are implied long-term interest rates, that exacerbated countries’ solvency problems.
In the absence of a central fiscal authority to send money to poorer parts of the currency area to temper the impact of a downturn, only painful reforms and a clampdown on prices and wages would restore competitiveness and fuel confidence in stricken states’ ability to grow out of debt.
Cue endless wrangling between the European authorities and southern governments, and a cascade of market panic attacks focused on different countries until ten years ago this week Mario Draghi promised to do “whatever it takes” to keep southern bond yields low. The prospect of the European Central Bank hoovering up enough bonds to keep the yields down kept the wolf from the door, and a similar mechanism, the Transmission Protection Instrument, was launched last week, again against a backdrop of turmoil in Italy.
The wolf is still there, however. There is still ample scope for market panics and political clashes between Brussels and the member states, while the EU’s construction of a fiscal union (with an incipient banking union and a Covid-19-induced recovery facility allowing the EU to borrow collectively) is proceeding at the speed of a hungover giant sloth. More broadly, the eurozone is still stuck with a structure that acts as a deflationary straitjacket for much of the south, a recipe for recession and rancour. Until there is a European government or the euro is dismantled, the eternal crisis can only be managed or fudged – never resolved.
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Why complacent Germany needs to get a gripBriefings The gas-supply crisis is merely the most conspicuous sign of the complacency and drift besetting Europe’s largest economy. Germany’s national business model needs an overhaul.
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France’s government collapses – could it trigger the next euro crisis?Briefings France’s government has toppled after losing a vote of no-confidence, plunging the euro zone’s second-largest economy into turmoil. Is this 2012 all over again and should Europe be worried?
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Eurozone economy heads for paralysisNews Record high energy prices, the threat of recession in Germany and squabbling in Italy's government has left the eurozone fighting fires on all fronts.
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Is the eurozone heading for another crisis?Analysis The eurozone avoided breakup when Greece couldn’t repay its debts after the 2008 financial crisis. Now it’s in trouble again, says John Stepek. And this time the focus is on Italy – a much bigger economy than Greece.
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A new headache for the ECBNews Italy, the eurozone’s third-largest economy, has debt of €2.759trn – almost 150% of GDP. A crisis there would pose an existential risk to the euro.
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ECB set to raise interest rates as stagflation beckonsNews With inflation at 8.1% and economic growth at just 0.3%, the eurozone is on the brink of stagflation. To combat it the European Central Bank is to stop buying bonds immediately and could raise interest rates next month.
