By Matthew Lynn
| Opinion: Economic and political crisis still rages on
Mario Draghi, president of the European Central Bank, can declare victory: The financial crisis is over. However, the economic and political crisis is just beginning. Put out the flags. Run up the bunting, and start building the memorials. The euro-zone crisis which, for much for three years from 2011 onwards, threatened to blow up the single currency /quotes/zigman/4867933/realtime/sampled EURUSD -0.02% , and quite possibly the global economy as well, is now over. The European Central Bank, the governments of Germany, France, Italy and Spain, and the International Monetary Fund can now declare victory. The late-night crisis meetings in Brussels, and the promises of unlimited firepower to unleash against the speculators, can now be left to the historians to ponder over. Over the last weeks, there have been a series of signals that the worst of the crisis is now passed. Such as? Italian /quotes/zigman/15866487/realtime BX:TMBMKIT-05Y +0.23% and Spanish five-year bond yields /quotes/zigman/15866435/realtime BX:TMBMKES-05Y -0.02% have now fallen to the same levels as those on U.S. Treasurys. Greece is rumored to be about to re-enter the bond market for the first time since the country went bust. And the euro is taking a growing share of central-bank reserves. All of those would have been unimaginable even a year ago — and they are all certainly signs that this is not a currency that is about to disappear. The trouble is, while the financial crisis is over, the economic and political crisis is only just beginning. The markets will not tear the currency apart, but over a far longer period grinding recession will do the same job, and probably more painfully. Through much of 2011 and 2012, it looked as if the future of the euro was in the balance. The markets were constantly attacking the currency. Yields on Greek bonds soared to more than 30%. Italy was on brink of insolvency, and the government of Silvio Berlusconi had to be hastily evicted from office to calm the markets. Spain came close to joining Portugal and Ireland in bankruptcy. The collapse of the Cypriot economy threatened bank runs across Europe, and private banks busied themselves with transferring assets to safer havens in Switzerland or London. There was a constant succession of weekend summits as the IMF and the leaders of the EU cobbled together yet another rescue package, few of which lasted longer than a few days. It certainly seemed possible that the whole construct could fall apart chaotically, under attack from the markets. The events of the past few weeks have suggested that is no longer likely. Ever since Mario Draghi promised to use the full firepower of the European Central Bank to save the currency, the markets have steadily backed away. Bond yields are now dropping in all the crisis-hit countries, and are now back to normal levels. Countries have access to the financial markets. Ireland is out of intensive care, and even Greece may be issuing bonds again soon. The single currency is taking a growing share of central-bank reserves. According to research from International Monetary Fund, the euro’s share of currency reserves rose from 24.1% to 24.4% over the last quarter of 2013. The dollar saw its share drop from 61.7% to 61.2% — the single currency’s long-term goal of replacing the dollar is back on track, even if it still has a long way to go. Given the strength of the euro on the foreign-exchange markets, it seems likely that buying continued in the first quarter of this year. The euro is no longer a currency being dumped by the financial system. There is of course a message in that for investors. If you aren’t about to wake up one morning and find the lira and peseta have suddenly been restored overnight, then there is a no reason not to buy European shares. Plenty of the continent’s big companies are good values compared with their competitors in the U.S. and Asia — and there is no doubt plenty of upside left. The problem, however, is the victory over the financial markets has come at a terrible price. In effect, the euro zone has swapped a financial crisis for a political and economic one. Across the euro zone, unemployment stands at 11.9%, or 19 million people. In Italy it is 13% and in Spain and Greece it is above 25%. Youth unemployment is far worse — 23.5% across the entire zone, and above 50% in the worst-hit countries. Joblessness has fallen sharply in the U.S. and the U.K. over the past two years — so much so that central banks are looking to raise interest rates again. But in the euro zone, it remains at punishing levels. And this, remember, is probably the peak of the recovery phase of this business cycle. What will happen to those economies when the next downturn comes — as it certainly will — does not bear thinking about. The Greek economy is 25% smaller than it was when the crisis started, and shows little sign of recovering. Italian output is no greater than it was when it joined the single currency. Ireland has dropped out of the club of super-rich nations, and may never rejoin. Long-term damage has been done to all those economies, from which they may never recover. A whole generation of Spaniards and Italians probably won’t ever find work — most research shows that if you haven’t had a job by the time you are 25, you don’t ever get one. The next phase of the euro zone’s recovery needs to be genuine growth. Expansion has to accelerate, not to the dismal 0.1% that France managed in the last quarter, but up to the 3% to 4% levels that would start to claw back growth lost in the last few years and bring unemployment down to tolerable levels. It isn’t going to happen. Just as it did in the 1930s with a rigid gold standard, Europe has created a zero-growth economy. The result is a deep political crisis. Europe is stuck in structural depression, with massive levels of unemployment, mass emigration, and grinding austerity. True, it can hold together, so long as people are willing to put up with the pain. The question is how long that will be? For now, the financial crisis is over, and the euro has survived it. Over the medium term, however, it will be politics that decides its fate, not the markets. And that process is only just starting. |
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