The death of the euro is more likely than its survival
ECONOMICS:It was once unthinkable that post-1945 Germany would ever turn its back on Europe
AT THE beginning of each year, this newspaper publishes a preview of the coming 12 months. In the 2011 preview, I put the probability of the euro breaking up at 15 per cent. One year later, in the 2012 preview, it seemed close to – but still below – 50 per cent.
Now, more than halfway through 2012, I find it impossible to avoid the conclusion that the probability of break-up has gone above the 50 per cent threshold. In other words, the single currency project is more likely to collapse than to survive in its current form. Financial, economic and political problems appear too great to be overcome by a group of 17 countries that have proved unable to end the crisis.
Most developments so far this year have been negative. Spain and Cyprus have joined the bailout club and Slovenia is about to bring to six the number of euro zone countries that cannot sustain themselves unaided.
A €1 trillion liquidity injection into the financial system by the ECB failed to bring lasting calm. Banks across the continent are now more fragile than ever and the system’s impairment is a major contributing factor to renewed recession in the euro zone. Yet again yesterday, Frankfurt under-delivered, having over-promised in the days leading up to its monthly meeting.
The bifurcation of the euro zone sovereign bond market has reached new extremes, with some countries able to borrow almost for free, while a growing number are unable to borrow at all.
The potentially very important agreement among euro zone leaders on June 29th to move towards a banking union has yet to live up to any of its potential. Big questions remain about how fast and how comprehensive a euro zone banking union will be, if it ever materialises.
That is where we are now. The short-term future looks worse.
The Greek economy may be showing tentative signs of stabilising, but the worst is not over and recovery is a long way off. The new government continues to seek concessions before proving its ability to implement reform measures.
Given the economic and political trends, it is difficult to see Greece in the euro area one year from now. While its ejection would make the zone stronger in the long term, in the short term the effect could be to trigger panic in the rest of the periphery, thereby precipitating a disorderly unravelling of monetary union. Talk of building a credible firewall around Greece has come to nothing and, given the record to date of euro zone policymakers, no solid ring-fencing of Greece appears likely, if that is even possible.
Italy being locked out of the bond market is an even bigger and more immediate risk than a Greek exit. The public debt of the world’s eighth-largest economy is very high and rising fast – €1,946 billion at last count. The euro zone’s bailout mechanisms have nowhere near the resources to bail out Italy if it cannot raise the tens of billions it needs each month.