In recent months, many political figures have made statements about the end of the Eurozone crisis and its relative disintegration. Sovereign bond yields fell and economic growth returned. But GDP dynamics remains weak and unemployment high: is the Euro crisis really over?
The risk of a collapse of the Eurozone has decreased following the reforms adopted by the countries in crisis, the improvement of the Community institutional framework and, in particular, thecommitment made in the summer of 2012 by ECB President Mario Draghi in explicitly doing “whatever it takes” to protect the Euro. The austerity measures and structural reforms implemented in Greece, Ireland, Portugal and Spain have contributed to the rebalancing of these economies. The measures were impressive but painful. However, the difficulties, as published by Atradius, are paying off. Unit labor costs have fallen (between 8,5% in Spain and 13% in Greece), improving competitiveness, exports, reducing imports and transforming the current account from a deficit into a surplus. And all this for the benefit of the long-term sustainability of the Eurozone. institutional reforms at the supranational level they have also helped address some of the root causes of the crisis: the lack of inter-community coordination, the failure of budgetary surveillance and the incompleteness of the Eurozone itself. Policy coordination, strengthened fiscal surveillance, macroeconomic imbalances and corrective actions are all measures to strengthen economic and fiscal integration. Furthermore, remarkable progress have been accomplished with the Banking Union, whose peculiar characteristics can be found in the common banking supervision (the Supervisory Mechanism currently being set up by the ECB) and in the Common Bank Resolution Fund, with the aim of breaking the vicious link between sovereign states and national banks, revealed particularly disruptive during the Crisis. Bank creditors, for their part, will be involved in bank resolution measures, thus ending the massive bailouts paid by taxpayers. Without forgetting the monetary policy measures adopted by the ECB, which contributed to restoring market confidence. Interest rates have been cut further, the banks of the Eurozone were financed on a long-term basis through long-term operations (LTROs) and, as already pointed out, the ECB stated that it would do “whatever it takes” to protect the Euro, thus acting on investors' expectations. Consequentially, bond yields sovereign debt fell significantly and financing conditions for banks and firms improved (especially for Southern European countries). All of this, together with improvements in the global environment, contributed to a return to growth in the Eurozone economy during 2013, including
Countries in crisis with the exception of Greece, where however the rate of contraction of GDP is slowing down.
Despite improving conditions, economic growth remains slow across the Eurozone. The dynamics of GDP is weighed down by low levels of business investment and consumer spending. Consumer purchasing power remains under pressure given the fiscal consolidation measures taken. Labor cost could
declined, but this at the expense of household incomes themselves rather than as a result of rising productivity. At the same time, the still high unemployment rate weighs on consumer demand. And with weak economic growth and falling inflation, fear of a prolonged period of stagnation in the Eurozone is on the rise.
In this scenario the debt has continued to grow and is expected to increase further as most countries still face the problem of budget deficits. And a flare-up in risk aversion would rapidly erode public finances and the solvency of governments. Despite the fall of interest rates on consumer and business loans, levels remain high in all Southern European countries, much higher than the German rates. Firms in Spain and Italy pay around 50% more on new loans than German firms. Furthermore, due to the fall in the level of inflation, il the real interest rate fell more heavily than the nominal figure. Banks in these countries are still extremely cautious with their lending, mainly focusing on cleaning up their balance sheets following the ongoing EU-wide stress-tests.
Here then is that the institutional framework could be improved, but the question remains whether this will be sufficient. The numerous measures fall well short of the oft-cited need for full mutualisation of financial obligations. The creation of a Eurozone-wide deposit insurance scheme was completely scrapped due to political resistance while theBanking Union has yet to be fully implemented and its effectiveness demonstrated. Limited to €55bn, the banks' bailout fund is relatively small and, while the permanent bailout fund (ESM) has €400bn of sovereign debt back-up capacity, it took more than €200bn to bailout of Greece alone. Many governments still desperately need to implement or step up the necessary structural reforms, but this is only the first step given the need for a long-term strategy for growth. In this regard in June the Commission
European invited France and Italy, the second and third largest economies in the Eurozone, to step up reform efforts. The substantial difference between the performance of these countries and Germany relates to growth policies, not just mere consolidation. Easing financial market pressure reduces the incentive for governments to continue their reform efforts. AND without the simultaneous continuation of the economic-institutional reform of the Eurozone the complete recovery will be increasingly distantwhich makes it more difficult to implement and improve the existing Community institutional framework.
Existence of the Euro is no longer under discussion. But the economic crisis is still ongoing: the economic recovery is still far from complete, unemployment remains stubbornly high and the general price level is dangerously low. Many consumers and businesses across the continent are still feeling the effects. Not forgetting that the fundamental reasons behind the Euro crisis have not yet been fully addressed: the institutional framework remains insufficient and reform efforts are hampered by the complacency of national interest groups. All this leaving the Eurozone extremely vulnerable to crises in the future.
