One month before their annual August holidays, Europe’s leaders doubtless would like, for the first time in four years, to enjoy the sun without dreading that all hell is about to break loose in the eurozone. Events over the past week offer certain grounds for optimism.
After a crisis flared in Portugal last week with the finance minister’s resignation, it took just seven days for the nation’s leaders to bring it under control and calm financial markets. In Greece, which like Portugal survives on international life support, lenders are finding a way to keep the emergency funds to Athens flowing in return for admittedly incomplete reforms.
On a wider front, Croatia’s entry into the EU, the decision to start membership talks with Serbia and the approval of Latvia’s request to join the eurozone illustrated the continuing appeal of European unity. Finally, latest purchasing managers’ indices, which measure the outlook for private companies, were the most buoyant since March 2012. Europe should haul itself out of recession in the second half of this year.
These signs are encouraging but provide no real evidence that the crisis is fading, merely that it is entering a different phase. The next 12 months will throw up political, social and financial market challenges that will once again test Europe’s crisis management skills.
First, any recovery will take place amid fragmented credit conditions. Italian, Portuguese and Spanish companies, starved of affordable finance, are at a persistent disadvantage to rivals in Austria and Germany. This makes a mockery of the intended benefits of a single currency and renders it impossible for the private sector to slash mass unemployment in southern Europe.
At the same time, the conceptual framework of Europe’s crisis-fighting – money for sinners in exchange for suffering, self-criticism and promises of virtuous reform – will remain unaltered. In this regard it is not that important whether a centre-right, centre-left or grand coalition government emerges from Germany’s September 22 national election. No mainstream party shows an appetite for rebalancing the eurozone economy by deploying the German current account surplus to offset southern Europe’s economic slump.
The ideal of unity will come under pressure in European parliament elections in May, which will pave the way for the selection of replacements for José Manuel Barroso as European Commission president and Herman Van Rompuy as president of the European Council, the club of national leaders. Expect a surge in support for populist, anti-establishment and anti-EU parties.
For the foreseeable future it will be a chilly political climate for those who favour ambitious integration initiatives, such as pooling debt or a banking union including common deposit insurance. This was underlined last month in a Dutch statement declaring the era of “ever closer union” in every policy area finished. The fragile sense of common purpose surfaces, too, in the language with which the French government and Mr Barroso have attacked each other in past weeks.
These are more than straws in the wind. A strong spirit of collective endeavour will be required to adopt what is shaping up as a new round of financial support for bailed-out nations. Take the three-year rescue plans for Ireland and Portugal, which will end this December and in June 2014 respectively. Europe’s leaders had hoped to wind them up on time in a display of impeccable crisis management. But Ireland’s struggle to emerge from recession indicates that a smooth return to private capital markets is not guaranteed.
As for Portugal, the government crisis exposed the limits of political and public tolerance for austerity. An exit from its bailout is unlikely without more aid because public debt is rising towards 130 per cent of gross domestic product, meaningful economic growth is not in sight and almost a fifth of workers are jobless. Meanwhile, few experts think Greece can avoid another debt restructuring.
Since the first Greek rescue of May 2010, political conditions in creditor nations have grown increasingly hostile to assisting debtors. Yet the debtor nations’ patience with hardship is nearing its end. Over this toxic confrontation will rise the final curtain of the eurozone crisis.
Copyright The Financial Times Limited 2013