Experts show cautious optimism for the eurozone in 2014

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Last year was the least tumultuous for the eurozone since Greece revealed a vast hole in its books back in 2009. The consensus is that 2014 will be just as calm, a view held by some who were predicting the currency bloc's demise little more than a year ago.

The political will to keep the show on the road has held firm, the European Central Bank's pledge to underpin the euro continues to stave off bond market pressure and there is the prospect of economies growing at least a little.

Spain, Italy and Portugal are all emerging from recession and Greece should follow suit this year.

Yet there are plenty of reasons to be cautious.

EU elections

High unemployment, austerity fatigue and still anaemic growth offer the perfect backdrop for fringe parties to prosper at May's European parliamentary elections.

Some pundits predict a group of anti-euro parties including the National Front in France, Britain's UKIP, Syriza in Greece and the Dutch Freedom Party could capture 20% or more of the seats.

That could pressure the EU's main party groups to tack right and challenge Europe's ability to integrate further given new powers the parliament will have to rule on the majority of EU legislation.

"It could pull mainstream parties into more eurosceptic positions and complicate both the appointment of a new European Commission (due later in the year) and the task of passing banking union-related legislation," said Alastair Newton, senior political analyst at Nomura Securities.

Banking union 

That the EU has fallen short of its initial plans for a banking union to prevent future financial crises is plain.

For several years at least, the buck for a failing bank will ultimately stop with national governments, leaving the "doom loop" ensnaring weak banks and indebted sovereigns unbroken.

The ECB will publish health tests of Europe's biggest banks prior to taking over their supervision in November.

The scope for a major shock is limited given the extent to which banks have already recapitalised. Still, lending is likely to remain constrained until the tests are complete - hampering economic recovery - and the structure of banking union as it now exists could allow a future crisis to blow up.

The main reason to be cheerful about the eurozone is the markets' unwillingness to test the ECB's safety net. Any hole in that would change the terms of the game at a stroke.

Germany's Constitutional Court will rule soon on the ECB's bond-buying programme, its as yet unused mechanism to protect the eurozone.

The history of the Karlsruhe-based court has not been to reject outright any crisis-fighting measures though it has bestowed greater levels of scrutiny upon Germany's Bundestag.

But if it did take the nuclear option, the bond market could declare open season on the currency bloc's weaker members once more, pushing it back into crisis.

Reform zeal

The ECB has consistently said it is buying time for countries to put their houses in order by curbing debts and enacting economic reforms needed to thrive in the 21st century.

The main flashpoints are Italy, which has stagnated for a decade and has a coalition government which may lack the cohesion to respond, and France which is teetering on the edge of a new recession.

"France remains the only major European economy which is beset by serious health problems and has not yet done much about it," Berenberg Bank said in its annual review of the euro zone.

President Francois Hollande used his New Year address to offer companies lower labour taxes if they hire more workers. But with his popularity levels at record lows, a radical leap is unlikely.

Austerity fatigue is most potent in Greece, the country that sparked the debt crisis.

Its coalition government refuses to countenance more cuts and will need some form of debt relief to put its finances on a sustainable path at a time when its parliamentary majority is down to just three seats and the anti-bailout Syriza opposition is ascendant in the polls.

Deflation 

If deflation took hold - a big if - that would pose the direst threat of all, raising the prospect of a Japan-style lost decade and making national debts even harder to pay off.

A plunge in euro zone inflation to just 0.7% prompted the ECB to cut interest rates in November but many of its members are viscerally opposed to the sort of money printing that finally breathed life into Japan's economy.

"We must take care that we don't have inflation stuck permanently below 1 percent and thereby slip into the danger zone," ECB chief Mario Draghi said last week.

Even without deflation, any slippage in debt-cutting and structural reforms may require further action from the ECB.

The history of the eurozone crisis shows that while policymakers lose their sense of urgency when the pressure diminishes, they rush to bolster their defences when the heat comes on and have consistently done so just in time.

"2014 stands to be more challenging and dangerous for euro zone financial markets than the surprisingly calm 2013," said Russell Jones, economist at Llewellyn Consulting in London.

"(But) predictions of the euro area's imminent demise have proved systematically wide of the mark."

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Comments

an european's picture

Last year, this year how many years are they continuing believing about optimism without a federal path!
As long Europe is german like dominating with Austerity measures to other states and with bunch of handful of inadequate nationals interests then it will be no optimism but the magic word is pessimism!
How can internals economies works on a federal currency ! It's rule is very simple to understand at higher level of course ! But managing it in 28 places with different rules as if it were a national one? How can nationals expect working this?
A mystery

international foundation for research and innovation  's picture

We are a group of international researcher and we have to tell you good news
Europe Union will have an fantastic economic grouth in 2014 and it will create millions of jobs For this purpose we will
1) help different countries to create a list of business opportunities which bring more than 25 % in less than 75 days
2)Implement those projects as soon as possible in Luxembourg and Austria and help them to keep investors who are ready to leave those countries in EU This is a priority issue because after Cyprus banking crisis a big parte of Cyprus banks money had arrived in Luxembourg and Austria and now as those countries will lose their major banking and financial advantages a big parte of this money will go out from EU economy