You might think the “euro-crisis” is solved. After all, the economy of the 19-country eurozone expanded at an annual rate of 1.8pc during the first quarter, outpacing Britain and the US. Surveys show French and German growth at a six-year high.
All that fuss about Greece, Portugal and Cyprus going bankrupt, and spreading “financial contagion” across the world, seems over. And Yanis Varoufakis, that dashing Greek academic-turned-finance-minister, who grappled with the German paymasters, has just published his memoirs.
It was almost five years ago, back in the summer of 2012, that the single currency looked like imploding. As yields on Greek, Spanish and Italian government debt spiked, governments slashed spending and riots broke out in normally laid-back European capitals.
The eyes of the world were glued to the London Olympics, but it was still impossible not to notice one of the “Club Med” members could soon crash out of the euro – whether forced by German bean-counters, market vigilantes or window-smashing thugs. Then, European Central Bank supremo Mario Draghi promised to do “whatever it takes” to save the eurozone. Since then, aside from the odd market squall, monetary union has seemed relatively calm.
Yet the reality, despite signs of growth, the eurozone remains mired in financial difficulties. While there was a global downturn after the 2007/08 sub-prime collapse, the US economy was back above its pre-crisis peak by 2011, the UK by 2013. The eurozone, enduring two successive recessions, didn’t fully recover until mid-2016.
Although restored to pre-crisis size, the eurozone economy still shows 10pc unemployment – twice that of America and Britain. And while German GDP is now 14pc bigger than in 2007, recovery has proved elusive for the likes of Greece and Italy. The Greek economy remains 20pc smaller than in 2007, after a worse decline than America’s Great Depression of the 1930s. Italy remains 7pc below where it was in 2007, having barely grown since the eurozone was launched in 1999.
The single currency has, for many millions of eurozone workers, been an unmitigated disaster. By binding less competitive economies into a high-currency straitjacket, making adequate depreciation impossible, it has generated prolonged economic stagnation. Youth unemployment in Portugal and Spain is way over 40pc and in Greece it exceeds 50pc – a human tragedy. Across southern Europe, eurozone economies have been largely moribund, amidst spiraling public sector debt. And despite the lack of lurid headlines now, monetary union could be tested by renewed systemic difficulties this summer.
Last week saw the latest failure of the Greek bailout negotiations. In 2010, Greece was granted a €110bn rescue package, the largest in human history. Today, Athens is seeking its third bailout, another €86bn – the latest bid to stop Greece crashing out of the eurozone, so preventing a broader panic. There is widespread fear that if Greece leaves, effectively defaulting by converting their debts into heavily devalued drachma, much larger eurozone economies might follow.
Talks are stalled over whether Greece has met the latest “austerity” conditions – tax rises and pension cuts – allowing the latest tranche bailout funds to be transferred. Athens could then meet a €7.3bn payment on other loans due in July, so avoiding default. The International Monetary Fund is trying to convince EU negotiators – i.e. Germany – that with government debt above 170pc of GDP, and 23pc unemployment, Greece needs at least some of its vast debt written-off or rescheduled, if it’s ever going to recover.
As Berlin knows well, though, that would upset voters across the northern eurozone, not least in Germany, where Greek woes are blamed squarely on profligacy and even corruption. Greek debt relief would also rile other bailed-out nations like Portugal and Cyprus, where the public has absorbed the pain of meeting tough loans conditions. After talks collapsed last week, the “spread” between Greek and German 10-year sovereign bond yields widened to almost 6 percentage points. There could well be market jitters as Athens’ July repayment deadline looms.
Beyond Greece, the fragile eurozone banking sector, hit by the prolonged slump, remains weighed down with bad debts. Such non-performing loans now amount to €866bn according to last week’s ECB Financial Stability Report, around 6.4pc of loans outstanding. The equivalent figures in the UK and US, where banks have better cleaned their balance sheets, is 1pc and 1.5pc.
Greek and Cypriot banks show shocking NPL ratios above 40pc. But the real problem is Italy, with an 17pc NPL share, equivalent to €320bn or almost 20pc of GDP. Italian banks also hold a large slice of the Italian government’s vast debt stock, totaling over 130pc of GDP. The Five Star Movement, led by former comedian Beppo Grillo, remains ahead in the polls, on a platform of quitting the euro. Were Five Star to become more popular, ahead of elections next spring, Italy could emerge as the epicentre of eurozone instability – an economy almost ten times the size of Greece.
Beyond that, Draghi is about to come under enormous pressure to curtail its QE money-printing programme. Far from being a laggard, the ECB has since 2008, via various covert means, used “extraordinary monetary measures” to the same extent as the US Federal Reserve. One should never underestimate, though, the extent to which Berlin detests QE. Finance Minister Wolfgang Schäuble has blamed Draghi’s policies for the electoral success of German right-wing nationalists, while warning QE could “ultimately end in disaster”. German academics and business leaders have filed complaints with the country’s Constitutional Court, accusing the ECB of expropriating money from German savers.
Ahead of German elections in September, Angela Merkel will lean very hard on Draghi to curtail QE – the resulting rhetoric sparking much market angst. Stand by for another hot eurozone summer.
Follow Liam on Twitter @liamhalligan