@MichaelSchumanMay 24, 2012
Since the start of Europe’s debt crisis in 2009, there has been a steady drumbeat of predictions that the euro
was doomed. The problems were too intractable, the debts too large, the
political will too feeble. So far, the doomsayers have been wrong. The
leaders of Europe have managed to put a bandage here and a few stitches
there to keep the monetary union together. But now we really have to ask
if the game is up. The years of half-measures, misguided policy and
delusional stubbornness may finally be building up to crush the euro,
like a cartoon snowball rolling downhill. Financial markets are clearly
smelling an approaching debacle – the euro this week hit its lowest
level against the dollar since mid-2010.
Let’s take a quick look at the mounting evidence of impending catastrophe:
Europe has all but admitted that Greece will exit the euro zone.
It seems impossible to me that the second round of elections in Greece
on June 17 will produce a government that will strictly adhere to the
austerity measures agreed to by the previous government in return for European Union
bailout funds. Yet German Chancellor Angela Merkel has made it clear
she has no intention of renegotiating. “We want Greece to remain in the
euro zone,” she said after Wednesday’s summit of E.U. leaders in
Brussels. “But the precondition is that Greece upholds the commitments
it has made.” With that attitude, the leaders of Europe might as well
boot Athens out of the union right now. Unless someone is willing to
bend here, Greece won’t get its rescue money, and will likely run out of
funds by early July, which could force the country to reissue its own
currency. No wonder European finance ministers earlier this week talked
of the need for contingency plans to combat a Greek exit.
If a failed bailout doesn’t push Greece out of the euro zone, the
slow-motion bank run will. Unless something is done to stop the flow of
deposits out of Greek banks, the sector will eventually fail, and that,
too, could propel Greece to ditch the euro. And if that happens, the
Greek bank run could spread to other weak euro countries like Spain and
Italy, nudging them out, as well, and threatening the entire union.
If Greece doesn’t tip off a wider crisis, then Spain just might. The
situation in Spain continues to deteriorate. The zone’s fourth-largest
economy finds itself in a nasty, no-win situation. If Madrid moves
aggressively to fix its banks, which are burdened with massive bad loans
from the country’s property bust, it could blow out the government’s
finances (as in Ireland) and push the country towards a bailout. If
Madrid continues to go slow on fixing its banking mess, uncertainty will
persist, the economy will remain stagnate, and the country could slip
towards a bailout. If the Spanish government asks the euro zone for
funds to help shore up its banks, it could get cut off from private
funding and end up needing a bailout. All I can say is: Oy vey!
Meanwhile, amid all of this chaos, the leaders of Europe have had no
response. At their summit this week, European leaders announced no new
initiatives for tackling the debt crisis. In fact, the divisions in
Europe appear to be widening. Camps are emerging between those who want
to move more decisively towards solving the crisis, by, for instance,
issuing eurobonds, and those (in other words, Germany) who refuse to
change course despite the mounting evidence that that course has failed.
It comes as no surprise, then, that people are openly talking about
preparing for an end to the euro. Martin Jacomb, chairman of Share Plc, wrote in the Financial Times that it might be best for Europe to simply throw in the towel and concede that the euro is a failure:
One way would be to accept that the opportunity to “save the euro” has been lost and for all 17 members to decide at once to revert to national currencies. The chance of differentiating between eurozone countries, weak and strong, has been lost.
Of course, nothing is inevitable. Even a Greek exit from the euro
zone would not necessarily doom the entire currency. We’ve also hit
these boil points in the crisis before – in May 2010, around the time of
the first Greek bailout; and in November 2011, when Italy destabilized – and each time the leaders of Europe managed to yank a rabbit out of a hat and hold the monetary union together.
Yet the risks are rising that the debt crisis is slipping out of
Europe’s control and the weight of the combined threats to the euro is
becoming overwhelming. The world needs a firm plan of action from
Europe: a euro-wide deposit insurance scheme to stop a euro-wide bank
run; a real recapitalization program for weak euro zone banks; a clear
plan on what to do with Greece; an expanded firewall to protect Spain
and Italy from any Greek fallout; and a true agenda to support growth.
We’re not close to any of these steps. The more time slips away, the more likely the euro will, too.
