Brussels E-briefings: Can the euro crisis kill Europe in 2011?

Brussels e-briefings host: Richard Werly
Date: 13 January 2011, at 15:00 CET

Digest – Can the euro crisis kill Europe in 2011?

The year 2011 will certainly demonstrate that the euro is here to stay. The beginning of the year already shows that EU member states are getting ready for further action if needed. The fact that Portugal and Spain were both able to borrow money from international markets this week shows that confidence, albeit fragile, is returning. In 2011, the leading financial and political player within the EU will be Germany. And because Berlin does not want to risk implosion of the eurozone at present, the continuation of bailouts by the EU is foreseen. Therefore a payment default by Greece, Portugal, or Ireland does not seem likely.

Can January 2011 be a turning point for the eurozone as Portugal, Spain, and Greece are presently borrowing again from the markets?

Yes, it can. The year has started with good news. Portugal and Spain borrowed several billion last week on the international markets. The European Commission is demonstrating more assertiveness. Clearly, the last European summit in December which demonstrated the commitment of Heads of State to the euro has opened up a window of opportunity. We have now a timetable in sight with an ECOFIN/Eurogroup meeting next week and the next European summit scheduled for 4 February.

Can we expect a default of payment from a Eurogroup member country in 2011?

It is a possibility we cannot exclude, namely when looking at the situation in Portugal and Greece. Such a default wouldn’t necessarily mean the end of the eurozone, though it would probably trigger a new wave of financial instability and market speculation on the future of the single currency. If such a default were to materialise, the German theorem would be proven true: a two-speed Europe will, de facto, exist and the institutions will have to face this reality.

Is the European Union equipped to face further market speculation and financial instability?

The decision made last December to create a permanent European financial stability mechanism is a move in the right direction. The commitment to European solidarity shows that progress has been made since the disunity over the Greek crisis in spring 2010. The European Summit’s commitment to defend the euro at all costs gives the eurozone the necessary margin of maneuver to increase the amount available for the existing emergency financial facilities.

Could 2011 mark the dislocation of the eurozone?

Such an opinion, except among prominent American economists, is not shared by the majority of international observers. The eurozone will have to cope with more divergence among its member states. The idea of common, low interest rates for all is gone. Easy money is gone. The euro will cease to be an excuse for economic mismanagement. There is a possibility though, that we might see Germany pushing hard for conditionality and putting more and more pressure on weaker member states. A future in which the eurozone is formed around Germany and some of the EU’s most financially orthodox countries cannot be excluded. Don’t forget that the actual Treaty does not permit an exit from the euro. How to proceed will also be a complicated institutional issue.

What can we expect from the future European Monetary Fund to be installed by 2013?

Yes, it will be a European Monetary Fund (perhaps not in name, but in every sense that matters). Most probably, this fund will replicate the IMF missions inside Europe. The question is whether, to match their austerity efforts and to defend their economies, some weaker European countries will ask for more protectionism. This EMF will, de facto, implicate a change of mission for the IMF at international level.

Is Germany committed to the euro?

The truth of the matter is that Germany is divided. This dividing line cuts across its elite, its business circles, and its population. While Germany is committed to Europe and the euro is Europe’s main instrument of solidarity, it is less and less inclined to endanger its economic interests. There is indeed a risk of a return of Germany’s feeling of superiority which, in the past, has been badly received within the EU.

Where are the incoming dangers for the eurozone?

The main danger is to underestimate the market’s doubts on the financial situation on the EU’s periphery. The second danger-in-waiting is the illusion of solidarity. Germany is not ready yet to sign blank cheques. The third danger is Europe’s political elite. Can a single currency be sustainable without a dynamic single market and without growth? The answer is no. The fourth danger is to believe that outsiders, like China, will solve European problems of mismanagement by footing the bill.

Questions? Post a comment below, or e-mail Richard Werly at richard.werly@letemps.ch