When things get complex, thinking gets muddled. There is still a lot to worry about inthe eurozone crisis. But it is just as important to understand what not to worry about. So here is my brief and imperfect attempt to bring a little simplicity and a little clarity to the ongoing eurozone crisis.
My list of things not to worry about contains five items. The first is France.The Economist last weekappeared to pass the honorary title of "sick man of Europe” to France. I think this is wrong. The relatively robust growth during the third quarter was a fitting example that France is often more resilient than forecasters and commentators generally acknowledge. The French economy has had a relatively good crisis and has often defied negative expectations, especially from commentators who view the universe from aperspective of competitivenessalone. I suspect that the currently fashionable French-bashing is politically motivated – a rightwing reaction against a Socialist president. I am wondering that if France was really an economic basket case, why did so few people say so while Nicolas Sarkozy was in power? What reforms did he make? In 1999, by the way, The Economist awarded the title of"the sick man of the euro”to Germany.
The second is competitiveness. It is true that Germany has gained competitiveness over the past 10 years, when defined in terms of how much output is produced given the wage of a worker, but this process is already reversing. This year, unit labour costs will increase by 3 per cent in Germany, and fall by 8 per cent in Greece, according to a senior European official. An 11 per cent adjustment is a big deal. Spain, too, is adjusting.
The third thing not to worry about is extremist political parties. They exist, of course, and they have become more popular. The rise of the far-rightGolden Dawn partyin Greece is troubling, of course. But I do not expect extremist parties to alter the course of eurozone politics. The recent election in the Netherlands strengthened the political centre ground, despite the country’s deep recession. In France, the National Front had a good result in the presidential elections but Marine Le Pen, its leader, did not make the second round. In Italy, theFive Star Movement, the comedian Beppe Grillo’s anti-eurozone party, occupies second place in the polls. But it will be easily outflanked in the April general elections. And the only political innovation in Germany is the Pirate party, who are delightfully silent on the euro.
Fourth on my list is the German constitutional court. The legal issues involved in the eurozone crisis management are hugely complex and many good proposals cannot proceed for legal reasons. But the real constraint is political, not legal. If Germany rejects fiscal transfers, or debt writedowns, it will be due to a lack of political majorities, rather than the court. Its latest ruling on the European Stability Mechanism, the bailout fund, shows that this is a court that barks, but does not bite.
And finally, I am not worried about the next tranche for Greece, or for that matter, the one after that. Yes, watching this is all very nerve-wrecking. A two-year extension of the Greek program costs some €32 billion, and they have yet to "find the money”, as one official put it. In my years in Brussels I have learnt never to underestimate the ability of European technocrats to find money. They will stretch the loans, reduce the interest rate and construct a hugely complicated, transparency-obfuscating special purpose vehicle if they need to. If they do not find the money, they will find half the money for half of the time, and go back next year and look for the rest. I am not condoning the strategy, on the contrary. I am merely saying that they will find the money.
With this list of things not to worry about, it is now easier to focus on what I do worry about. The first of those, and the most important, is the impact of austerity on growth. The year 2013 promises to be an awful one for the eurozone economy that could well derail the current strategy.
The second on my list is the continued failure to resolve the crisis, and accept the inevitability of an official sector involvement in a future Greek debt restructuring – or direct transfers. Pushing resolution beyond the German elections in September next year is bordering on the insane.
And finally, the banking union faces further delays and is now subject to a lack of ambition. It will have no positive effect on the crisis because it will not separate the banks from their sovereigns, and contains no power of resolution and no deposit insurance. The debate has degenerated into a typical inter-institutional fight about who gets to do what.
As you can see, my list of things not to worry about is the longer one. This is not a return to optimism – no danger here. It is a plea to focus on the few things that really matter.
Copyright The Financial Times Limited 2012.