The Eurozone has recently been off our news radar. We Brits have become smug of late given our new-found growth, now that we’re the most rapidly expanding economy in the Western world (almost).
We certainly have a sense (oh joy!) that the “continental” economies aren’t doing as well as ours. Apart from those pesky Germans, of course, who are annoyingly good at making stuff the rest of the world wants to buy.
Yet, the euro as a tinder-box, which at any minute could spark financial meltdown – that fear seems to have gone. The euro as a ticking-time bomb, about to explode, causing another Lehman-style Minsky moment on global markets – surely, all that has been dealt with, sorted, solved?
I’d like to tell you that were true. But I can’t, because it isn’t. The Eurozone’s deep structural flaws remain as ever they were. This jerry-rigged monetary union, for all the fanfare, arrogance and “solidarity”, is fundamentally just as vulnerable as it was in the summer of 2012 – when suddenly, everyone started worrying aloud that the single currency wasn’t, as we’d always been told, “irreversible”.
Up until then, it was only been “nutters” like me who openly questioned the Eurozone’s long-term survival. We raised such “mad” questions not because we’d spent much of our adult lives studying economics, history and the minutiae of currency unions – oh no – but because we were “cranks” and “xenophobes”.
Back in that Olympic summer, though, as government bond yields in the likes of Greece, Spain and Italy spiraled, and riots broke out in previously laid-back European capitals, everyone realized that some profligate members could crash-out of monetary union, forced by market vigilantes and window-smashing thugs, or maybe even kicked-out by Germany (with the Finns and the Dutch providing moral cover).
But then newish European Central Bank President Mario Draghi promised to do “whatever it takes” to save the euro. At the same time, politicians began talking about “banking union” – and with extremely serious faces. As if by magic, there was calm. The markets relented and bond yields fell back.
Since then, while it hasn’t been plain sailing, there’s been far less talk of a stormy “break-up” of monetary union. The euro is actually set to end 2013 as one of the best-performing main currencies – up from $1.32 in early January to around $1.37 today. The fact that the US government wanted this dollar depreciation, deliberately stoking it by expanding the Fed’s balance sheet $85bn a month is, of course, completely irrelevant.
To say the Eurozone is out of the danger zone is so complacent as to be laughable. All kinds of people have all kinds of reasons for painting as rosy a picture as possible – whether they’re trying to sell something, gain re-election or just because, and this is entirely understandable, they’re sick to death of all this post-sub-prime angst. Yet consider the facts, and then ask yourself if the single currency really is a coherent, sustainable structure – or if, in fact, the entire edifice is balanced on the head of a pin.
Yes, Draghi pledged to do “whatever it takes”. And so he set up the Outright Monetary Transactions programme, endlessly cited as the Eurozone’s main stabilizing factor as it allows the ECB to buy “unlimited” bonds issued by otherwise bankrupt Eurozone nations – essentially out of printed money. As soon as the OMT was announced, the “doom-loop” – within which busted banks and governments drag each other down – was apparently broken. The clouds parted, and the Eurozone’s turmoil was no more.
The trouble is that the OMT is a mirage. Under it, Draghi hasn’t yet bought a single government bond. Nor can he, because it can only be used if a country is already in a Greek-style bail-out involving endless humiliating conditions and democratic subjugation at the hand of the International Monetary Fund and others – so that rules-out Italy and Spain, the big two Eurozone economies posing the greatest danger. The OMT can’t buy Greek or Portuguese bonds either – because another condition is that participating nations can issue their own bonds to the market.
Perhaps the biggest obstacle to actually using the OMT is that Germany has never formally approved its formation. Draghi cunningly announced it while Merkel was on holiday. Facing election 14 months later, the German Chancellor didn’t want to outrage domestic voter opinion – so she didn’t OK it. But she wanted financial markets to calm down – so she didn’t quite veto it either. From the Iron Frau’s sun-bed, there was nothing but stony silence.
Yet the OMT is forbidden by European Treaties. It also amount to the straight monetization of Eurozone government debt, which cuts deep into Germany’s inflation-scarred psyche. So no-one actually knows, when it comes down to it, if its use is practical, legal or politically possible. There it remains, though, one of the twin pillars holding up the single currency.
Then there is Eurozone banking union – which has been in preparation since 2012 and last week saw some rather alarming developments. Under this scheme, a single Eurozone bank supervisor is supposed to be created, with the power to recapitalize troubled banks from a central rescue fund. Again, the idea is to stop the continent’s insolvent and still disgracefully opaque banks from bankrupting weak sovereigns.
In essence, though, banking union requires Germany and other creditor countries (but mainly Germany) to share the liabilities of other nations’ banks (however corrupt and however bombed-out their balance sheets). Can you really see that happening? No, me neither.
Yet the eurocrats, many of them having spent their entire careers on the bureaucratic Frankenstein that is monetary union, are pressing on regardless, their political masters too timid to stop them. Legal work has been “finalized”, we learnt last week, on an ECB-based supervisor that will take charge of 130 large banks, with powers to oversee another 6,000 smaller lenders.
Eurozone Finance Ministers are desperate to strike an outline agreement before an EU summit this coming Thursday. But huge gaps remain. The stated aim is to build a Single Resolution Authority (funded by levies on banks) to fund bail-outs, along with a common government-funded backstop. Many members of the European Parliament are furious that officials are planning the most significant ever piece of pan-European banking legislation beyond the oversight of elected lawmakers and outside of EU Treaties. So the entire project is on a constitutional collision course, even before individual countries try to agree on such sensitive issues as pooling the liabilities of their respective banks.
And, quite incredibly, all this is taking place before a newly-launched official review into the quality of Eurozone bank assets that isn’t due to report until the end of next year. Previous “stress tests” judged Franco-Belgian lender Dexia, Cypriot bank Laiki and Spain’s Bankia to be sound just months before they collapsed. So, even when the results of this renewed “deep audit” are published, everyone will know that they’re tosh – given the close links between national governments and their banking brethren.
Having contracted 0.5pc in 2012, the Eurozone economy is likely to shrink by a similar amount this year. Sky-high unemployment in “periphery” nations means tensions remain very real. In Italy last week, in an spine-chilling development, cash-strapped Turin riot police removed their helmets and holstered their truncheons, in a display of solidarity with the “Pitchfork Movement” protesters they were supposed to be controlling. The Eurozone remains on a knife-edge – and will be back on your news radar soon.