The common currency has survived for now but a fresh outburst of complacency could result in it still crashing to the ground
Widely predicted to be shedding countries by now, if not melted right down to a core, the euro instead started 2014 by adding a member, as Latvia joined the single currency club. There was no enthusiasm on the streets of Riga, but no matter. The mere fact of euro-expansion after all the betting on euro-contraction stirred something in the president of the commission – eastward the course of empire takes its way! In depression-ravaged Athens, of all places, José Manuel Barroso said that the currency was, more or less, out of the danger zone.
With the industrial recovery desperately fragile, prices close to deflation territory and unemployment stuck above 12% (compared with just over 7% in Britain) there are more reasons for fear than cheer in the real economy. But it is not only the allure of a slightly expanding eurozone map that is fostering smugness. There is also Ireland's unique success in cutting its way out of the bailout scheme, a development Mr Barroso seized on as showing "that the [austerity] programmes do work when they are properly implemented"; and – even more significantly – a new appetite in the markets for taking a chance on southern European debt. Getting the euro through to this point in one piece is certainly an achievement of sorts. But Mr Barroso badly misreads both the mood of the markets and the Irish experience. The danger now is of complacency giving way first to drift, and then – somewhere down the line – to a fresh crisis.
Ireland is, as the Guardian has argued before, a special case – being exceptionally open to trade and migration, and never having faced the sort of competitiveness problem that dogs southern Europe. It proves nothing about the efficacy of austerity as a general solution. As for the markets, the new flow of capital to the south reflects many things – the boosting effect of disinflation on real interest rates, for example, and stubbornly depressed yields elsewhere in the world. One thing that it does not indicate, however, is an assumption that the currency has returned to full health. Indeed, the easing of the acute phase of the crisis can be traced to the 2012 moment when Mario Draghi, president of the European Central Bank, promised an unlimited dose of emergency medicine, with the phrase "whatever it takes". Europe should count its luck that in Mr Draghi it has one authority figure who has some grasp of the dangers it faces – and the clout to do at least something about them. He followed up on his promise to, in effect, print whatever money was required to save the banking system, by cutting interest rates last autumn, and now pledging to keep policy loose after recovering economies elsewhere in the world start to tighten things up.
In sum, the euro has survived for this long only because, after Mr Draghi took the reins, the ECB took seriously the possibility that it might not. If a new outburst of complacency in northern Europe results in Berlin or Brussels manoeuvring to clip the ECB's wings, then the single currency could still crash to the ground. All energy in the council and the commission has gone into forging a banking union, whose most important elements will not be effective for years, and which is arguably a distraction. The underlying question remains the continuing willingness of southern European electors to return governments that will swallow the austerity which, in Europe's implicit grand bargain, is the price that the north extracts for tolerating Mr Draghi's emergency prescriptions. That willingness has come close to breaking point before; it could do so again.
The original sin of the euro-enthusiasts was to settle the politics first and then blithely assume that the economics would sort themselves out. What an irony if the same people are still jeopardising their own creation by blithely assuming, on the back of stabilising finances, that the politics can be relied to fall into place. Reported by guardian.co.uk 4 hours ago.
Widely predicted to be shedding countries by now, if not melted right down to a core, the euro instead started 2014 by adding a member, as Latvia joined the single currency club. There was no enthusiasm on the streets of Riga, but no matter. The mere fact of euro-expansion after all the betting on euro-contraction stirred something in the president of the commission – eastward the course of empire takes its way! In depression-ravaged Athens, of all places, José Manuel Barroso said that the currency was, more or less, out of the danger zone.
With the industrial recovery desperately fragile, prices close to deflation territory and unemployment stuck above 12% (compared with just over 7% in Britain) there are more reasons for fear than cheer in the real economy. But it is not only the allure of a slightly expanding eurozone map that is fostering smugness. There is also Ireland's unique success in cutting its way out of the bailout scheme, a development Mr Barroso seized on as showing "that the [austerity] programmes do work when they are properly implemented"; and – even more significantly – a new appetite in the markets for taking a chance on southern European debt. Getting the euro through to this point in one piece is certainly an achievement of sorts. But Mr Barroso badly misreads both the mood of the markets and the Irish experience. The danger now is of complacency giving way first to drift, and then – somewhere down the line – to a fresh crisis.
Ireland is, as the Guardian has argued before, a special case – being exceptionally open to trade and migration, and never having faced the sort of competitiveness problem that dogs southern Europe. It proves nothing about the efficacy of austerity as a general solution. As for the markets, the new flow of capital to the south reflects many things – the boosting effect of disinflation on real interest rates, for example, and stubbornly depressed yields elsewhere in the world. One thing that it does not indicate, however, is an assumption that the currency has returned to full health. Indeed, the easing of the acute phase of the crisis can be traced to the 2012 moment when Mario Draghi, president of the European Central Bank, promised an unlimited dose of emergency medicine, with the phrase "whatever it takes". Europe should count its luck that in Mr Draghi it has one authority figure who has some grasp of the dangers it faces – and the clout to do at least something about them. He followed up on his promise to, in effect, print whatever money was required to save the banking system, by cutting interest rates last autumn, and now pledging to keep policy loose after recovering economies elsewhere in the world start to tighten things up.
In sum, the euro has survived for this long only because, after Mr Draghi took the reins, the ECB took seriously the possibility that it might not. If a new outburst of complacency in northern Europe results in Berlin or Brussels manoeuvring to clip the ECB's wings, then the single currency could still crash to the ground. All energy in the council and the commission has gone into forging a banking union, whose most important elements will not be effective for years, and which is arguably a distraction. The underlying question remains the continuing willingness of southern European electors to return governments that will swallow the austerity which, in Europe's implicit grand bargain, is the price that the north extracts for tolerating Mr Draghi's emergency prescriptions. That willingness has come close to breaking point before; it could do so again.
The original sin of the euro-enthusiasts was to settle the politics first and then blithely assume that the economics would sort themselves out. What an irony if the same people are still jeopardising their own creation by blithely assuming, on the back of stabilising finances, that the politics can be relied to fall into place. Reported by guardian.co.uk 4 hours ago.