After a two-year siesta, the eurozone is back in the financial markets’ firing line due to stagnating growth, low inflation, budget problems in France and Italy and rising political risk in Greece, where the bloc’s debt crisis began in 2009.
This is not euro crisis 2.0, at least not for now. The bond market is nervous but not seething with contagion as it was in 2010-12. This week’s global market sell-off was provoked by weak US and Chinese data, adding to concerns about a global slowdown.
But four overlapping factors have rekindled anxiety about the eurozone’s stalling recovery amid rising political tensions both among its leaders and between economic giant Germany and the European Central Bank:
- economists and investors are concerned Germany is pushing the wrong austerity recipe for its own and other eurozone countries’ economic problems, depressing demand and neglecting sorely needed public investment;
- the United States, IMF and others are worried that the European Central Bank’s monetary policy easing may be too little and too late, and that it may lack the political support to take bolder action;
- a clash between the EU authorities and France and Italy over their 2015 budgets is about to come to a head, with Paris and Rome resisting peer pressure to cut their deficits;
Greece’s politically motivated dash for a premature exit from its 240 billion euro bailout programme has raised market doubts about its ability to fund itself without external aid and risks of an early election bringing radical leftists to power.
“The fear is back,” a senior EU diplomat said. While traders are no longer speculating on a possible breakup of the eurozone, “any thought that the crisis was over has gone”.
German Chancellor Angela Merkel told parliament in Berlin on Thursday that the eurozone must not drop its guard.
“The crisis has not yet been permanently and sustainably overcome because the causes, regarding the set-up of the European economic and currency union and the situation of individual member states, haven’t been eliminated,” she said.
Merkel insisted all eurozone member states must stick to the EU’s strict budget rules, a veiled criticism of a Franco-Italian drive for more time to bring down their deficits.
“All – and I stress here once again – all member states must fully respect the reinforced rules of the stability and growth pact,” she said.
By contrast, France and Italy believe Europe’s priority must be to stimulate the economy. “Relaunching growth is the best way of stabilising the markets,” French President Francois Hollande said as he arrived for a meeting of European and Asian leaders.
He won support from Italian Prime Minster Matteo Renzi. “We have cancelled the word ‘growth’ for years to focus on fiscal discipline, but we cannot exit this crisis without investments,” he said before the Milan meeting.
Merkel made no mention of international pressure on Berlin, underlined in a US Treasury report to Congress on Wednesday, to do more to revive growth, saying only: “We can show in Germany that growth and investment can be strengthened without abandoning the path of consolidation.”
Merkel’s government is focused on achieving a balanced budget in 2015 for the first time since 1969, and determined not to be blown off course by demands for a big public works programme.
The U.S. report spelled out more politely what German Finance Minister Wolfgang Schaeuble heard in blunt terms from critics at the annual International Monetary Fund meetings last week.
Washington, and Keynesian economists in Europe, say Germany should be boosting demand to counter falling growth rates and evaporating inflation that could tip into a downward spiral of prices and wages.
EU officials are seeking a grand bargain in which Germany would invest more in infrastructure, France and Italy move further with economic reforms in return for budget leeway, and the ECB would have political cover for more monetary expansion, including if necessary printing money to buy government bonds.
It was ECB chief Mario Draghi’s declaration in 2012 that he would do whatever it takes to save the euro that drew a line under the bloc’s debt crisis. He may now finally have to back words with actions.
The aim is to clinch a deal at a Dec. 18-19 European Union summit, EU officials say, but they acknowledge there are many obstacles and any agreement may fall short of what is required.
Germany’s central bank and finance minister are already critical of the ECB’s plans to buy repackaged loans and covered bonds from banks to counter “lowflation”. Germany’s financial establishment is utterly opposed to quantitative easing.
French Finance Minister Michel Sapin, under fire for going back on the country’s commitment to cut its deficit to 3 percent of national output in 2015 and demanding two more years, underlined the difficulties.
“Four issues are on the table for the eurozone to return to durable growth: monetary policy – it’s done; then we governments have three issues to address: budget consolidation, structural reforms and investment,” he told reporters in Paris.
“Just because all these issues are being discussed together does not mean it will give rise to a compromise or trade-offs. There has to be movement on all these points,” Sapin said.
The executive European Commission seems likely to send the French budget back to Paris for redrafting later this month, aggravating the political dispute over economic policy.
Behind the scenes, Berlin and Paris are scrambling to find a compromise that enables France to go further in tightening its budget and reforming rigid labour and product markets, while Germany would make a gesture on public investment.
The risk, a senior EU official said, is that a December deal is too minimal to revive growth or restore confidence.
Meanwhile, uncertainties over Greece seem likely to grow with conservative Prime Minister Antonis Samaras fighting for his coalition government’s survival by trying to declare an early end to its deeply unpopular EU/IMF bailout programme.
Greek 10-year government bond yields soared above 9% on Thursday – a level at which Athens could not afford to rely on market finance – as investors fretted about the risk of a snap election next March that could bring the anti-bailout leftist Syriza party to power.
EU officials say Greece will need at least a European precautionary credit line subject to reform conditions even if it forgoes further assistance from the IMF, which is deeply unpopular in Athens.