A critical design flaw in the euro project meant that problems were inevitable.
The UK’s prime minister David Cameron recently said that we were only about halfway through the eurozone crisis. It is a depressing prospect but probably realistic. A smaller currency area that ran into trouble could have been unravelled and rebuilt by now. But when the economy involved accounts for 20% of global output, the same rules do not apply.
The eurozone crisis is now impacting the entire world with emerging markets starting to slow down, and yet a solution seems as far away as ever. The double problem of the eurozone is that it requires both an economic and a political fix – right now neither seems likely.
The technically easy bit of the economic fix is fiscal consolidation, the transformation of the European Central Bank into an institution with the same independent mandate for monetary stimulus that the Federal Reserve and the Bank of England have, and the issuance of eurozone-wide bonds.
But even these measures – which are currently being resisted by some eurozone members, particularly Germany – do not solve the key issue of making weak economies such as Portugal and Greece productive and competitive in euros. This is such a critical design flaw that it is a wonder that the euro project was ever put on the starting block and no surprise at all that it does not fly. It will take years to make these economies competitive again.
However, even if economists could solve the technical issues, they require politicians to implement them. Right now they seem incapable of this, with the German/Greek divide as wide as ever but with any kind of solution inevitably falling between the two extreme poles of austerity at one end and a mixture of debt forgiveness and stimulus at the other.
Who will blink first? Almost certainly Germany. The Greeks, after all, have less to lose with their economy already trashed, the citizens out on the streets and the reputation of their politicians in tatters. Meanwhile Germany is becoming more and more isolated, coming under pressure at May’s G8 meeting, with added criticism from the Organisation for Economic Co-operation and Development and the emergence of a very different kind of French president in the form of the newly elected Francois Hollande.
Germany has been the main beneficiary of the eurozone and its demise would send its economy into a Greece-like spin. The voters may not like coughing up funds to put the project back together but they will like the alternative of its collapse even less.
The slowness of this realisation has turned the eurozone into a horror show but is also going to provide some kind of a solution eventually.
