“It sounds far-fetched, I know,” I wrote in this column in December 2007. “But the ultimate victim of this sub-prime crisis could be nothing less than the single currency’s existence”.
Reading it today, the above statement seems pretty reasonable. Many mainstream analysts now recognize the huge stresses imposed by the on-going credit crunch could yet see monetary union break up, with at least one country leaving. To argue otherwise, certainly in Anglo-Saxon company, is to risk appearing in denial.
After the eurozone’s successive summer bond crises of 2011 and 2012, it’s no longer particularly controversial to accept what we skeptics have been warning about for years – that the “irreversibility” of monetary union is merely a political slogan.
A peripheral member-state could indeed leave of its own accord, or be forced out, so escaping the straitjacket of a vastly over-valued currency. Another may then opt, or be asked, to follow. Saying so is now part of reasonable economic discourse, not necessarily the start of a row.
The first time I wrote the words that begin this article, though, getting on for seven years ago, the situation was rather different. Back then, only “xenophobes” “cranks” and “nutters” argued the eurozone might not survive. The sub-prime meltdown, moreover, was seen as “America’s crisis”, for most French, German (and even British) observers a problem most definitely made on Wall Street.
It seemed weird, then, to suggest back in December 2007 that the most spectacular fall-out from sub-prime – not only a severe market dip and related economic downturn, but something even more catastrophic, the forced break-up of vastly symbolic supra-national structures – could actually happen in Europe.
It doesn’t seem weird now. Last week’s turmoil on global markets, which saw Greek bond yields pushed above an eye-watering 9pc, mean the eurozone crisis is back. As sovereign borrowing costs across several member states spiraled – not just Spain, Portugal and Italy, but France too – yields on 10-year German bunds plunged to an all-time low of 0.72pc, as panicked investors searched for safety.
This sharpening divide, or “yield-divergence” in the jargon, means that vast multi-billion euro sums are being bet, once again, on the prospect of a eurozone break-up.
It strikes me that Europe’s initially smug response to “America’s crisis” was always blinkered, jingoistic nonsense. Eurozone banks were also extremely top-heavy back in 2007, in many cases more so than their US counterparts. Traders across Western Europe, we now know, had similarly gorged themselves on derivatives backed only by extremely shaky mortgages and other dysfunctional consumer loans.
Long before 2007, it was clear to anyone with a reasonable knowledge of failed monetary unions throughout the ages, that the eurozone suffered from a deeply-engrained flaw. A single currency shared by separate national democracies, can only hold together with regular and substantial fiscal transfers between member states. And such transfers will only be remotely legitimate if the ultimate aim is to unite and become one country.
“Ever closer union” is at the heart of the European Union’s articles of association, of course. It’s the eurocrat’s ultimate dream. On the ground, though, the single currency’s incoherence, is tearing Europe apart. Unemployment in Spain is 25pc (and a heart-breaking 50pc among youngsters). France has stalled, averaging just 0.5pc growth over the last four years – with voters increasingly blaming the euro.
Germans, meanwhile, are increasingly wondering why they should bail-out profligate “Club Med” nations, while peripheral countries that have taken the pain of tough budgetary reforms now openly complaining about “core” countries that use their political clout to refuse.
Marie Le Pen’s Front Nationale attracted 26pc in the latest opinion polls. Le Pen – who openly advocates eurozone exit – would beat incumbent President Francois Hollande in a two-headed run-off for the Elysee. Even in Germany, where a sense of obligation to the “European project” runs deepest, the anti-euro Alternative fur Deutschland won 7 of the 96 seats in the European elections in May. In the tight coalition politics of Germany, the entry of AfD into the Bundestag, which seems inevitable, will seriously complicate Berlin’s Parliamentary arithmetic.
It’s clear that last week’s pyrotechnics on global markets were most definitely “made in Europe”. News that eurozone inflation hit a five-year low in September seriously spooked traders, with weak spending continuing to plague hopes of a meaningful European recovery. Amid such deflationary fears, separate data showed a sharp 3.1pc drop in eurozone imports, another sign of falling domestic demand.
There were growing concerns that the Syriza party, which opposes bail-outs and any form of adherence to related fiscal discipline, could soon come to power in Greece. The markets were also unnerved by a warning from the International Monetary Fund that less than a third of the eurozone’s banks have balance sheets strong enough to rebuild their reserves and boost lending – a sign that the “stress tests” scheduled for later this month could hold some nasty surprises.
And unlike previous eurozone crises, of course, there are now clear signs that Germany itself is suffering. Having grown 0.8pc during the first three months of 2014, German GDP shrank 0.2pc in the second quarter. The eurozone’s powerhouse is on the brink of recession. Industrial production dropped 4pc in August, the biggest monthly fall since early 2009. Exports were down 5.8pc – again, the steepest drop since the Lehman collapse.
Just a month ago, eurozone stocks were trading at their highest level in almost six years, with optimism spreading that quantitative easing would soon be forthcoming from the European Central Bank. Yet last week, Europe led a rout that saw some $5,000bn wiped off the value of equities worldwide – even including Friday’s partial recovery.
The Western world is clearly locked in a deep deflationary trend. The 10-year US Treasury yield, like its German equivalent, is on the floor, hitting 2.04pc last week and down almost 100bp since the start of the year. But that doesn’t mean QE is the answer.
A lot of people now argue that the eurozone is only in a mess because the ECB has been “unimaginative” compared with other major central banks, resisting the urge to engage in massive monetary expansion. Ergo, if the Germans loosen up, and allow big-time euro-QE, everything will be fine.
Such an argument, while it serves the banks and investors that get rich on QE, while allowing politicians to bury their problems, is wrong on so many levels. The eurozone is flirting with deflation not because QE hasn’t been big enough, but because Europe’s zombie banking sector remains awash with bad debts, resulting in a lending contraction every single month since the start of 2012.
That’s what lies behind the eurozone’s economic torpor, not a lack of virtually printed money. Rather than insisting on painful debt write-downs, and forcing a necessary restructuring of the banks, the ECB – massively panicked by the prospect of a single currency meltdown – now looks set to hose down its banking sector with yet more virtually printed money instead, just in time for the stress tests.
That will boost asset markets, of course, but do nothing to prevent Europe’s on-going economic stagnation. It always won’t solve the underlying structural problems of the single currency – problems that will ultimately result in a break-up.
I know that the conventional wisdom is that QE is the answer. But, as we so often see, not least when looking back to the earliest days of this crisis, the conventional wisdom is often wrong.