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10 reasons why the euro crisis may be incurable

10 reasons why the euro crisis may be incurable

After Italian election, '1984' beckons
Prepare for bleak times

by David Marsh in Berlin

Mon 4 Mar 2013

History shows how unstable equilibrium can last surprisingly long periods. During the First World War the western front was frozen into the terrain for three and a half years. The Cold War between the Soviet Union and the US lasted 40 years. For four decades, Greece was part of the Ottoman Empire.

Perhaps we should give up all hope of a solution. A long period of further confusion lies before us, similar to the continuous, inexplicable, unwinnable conflict among Oceania, Eurasia and East Asia in George Orwell's merciless '1984'.

There are 10 reasons why the crisis may be incurable.

1. The Italian election result was a deep setback for euro optimists. Many say the populists' victory was a vote against austerity. But more broadly it was a vote against the country being led in a way that no longer benefits Italians. The real structural reforms needed to get Italy out of the mess have not been introduced.

2. Fundamental disagreements over monetary union between the two key euro members Germany and France are increasing. Questioning over the compatibility of the two countries' objectives and methods is getting louder. France wants 'solidarity', Germany 'competitiveness'. Mutual willingness to make concessions is falling.

3. The lack of a reform-minded Italian government has made inoperable the European Central Bank's promised rescue mechanism, the untested OMT programme to buy weaker countries' government bonds. A pivot of this mechanism, at least as applied to Italy and Spain, is that they should obey EU- and IMF-ordained conditionality. Who in Rome can be expected to carry out orders?

4. Germany cannot stimulate its economy sufficiently to haul the distressed southern states back to sustained expansion. And in contrast to the favourable international environment of the German reform years 2003-05, when former Chancellor Gerhard Schröder enacted his controversial but (ultimately) successful ‘Agenda 2010’ initiative, Europe offers these countries no external growth impulse to cushion the painful effects of domestic reforms.

5. Chancellor Angela Merkel's political inhibitions against taking bold euro repair measures will grow before the German federal elections on 22 September. Few in Europe think the Germans have been particularly generous up to now with help for other countries. But the bitter truth is that we have now probably passed the high point of German readiness for European assistance.

6. The southern states still see enormous barriers against departing from the euro. Why should they want to when the money keeps flowing, from the ECB and other sources? And Germany and the other creditor countries will not and cannot simply force them out.

7. Similar considerations apply to any German readiness to leave unilaterally. Even though the Germans would take others with them, the political and economic consequences of a reversal of 60 years of post-Second World War German foreign policy would be earth-shattering. For the time being, there's stalemate. But this, too, may not last forever.

8. The major economic powers, the US, China and Japan, are not likely to press in the next few months for radical euro-healing measures. They have no interest in provoking a fire-storm which would lead to a destabilising appreciation of their own currencies and hamper recovery efforts.

9. In the run-up to the German election, where Angela Merkel is the opinion poll leader right now, the French government will be increasingly tempted to cooperate with the opposition, the German Social Democrats, to diminish Merkel's political prospects. It is difficult to see how intervention from President François Hollande can make much difference to German electoral attitudes. But he may try it. For the vaunted Paris-Berlin tandem, not positive news.

10. Should the ECB succumb to the temptation to buy Italian government bonds without government-agreed conditionality, that would represent a 100% contravention of repeated solemn promises by ECB president Mario Draghi. The result in Germany would be a storm of indignation that could sweep away much that has been accomplished. As in '1984', we should await bleak times.

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