@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.