Eurozone crisis: Why it may not be over yet

Trader on the New York Stock Exchange So, what now?

Apparently, global investors are having second thoughts about the eurozone crisis. They've decided it might not be over, after all.

Well, tell us something we didn't know, I'm tempted to say on behalf of many economists.

For them, the surprising thing about the past few weeks or so is not that the mood of calm in European financial markets appears to be ending, but that it lasted as long as it did.

A trillion euros is a lot of money. Even in today's many-zeroed world. The European Central Bank could reasonably expect to get quite a lot of market tranquillity in exchange for all the cheap loans it has doled out to European Banks since the end of last year.

But, as I and others have pointed out many times, the worries about bank funding are only one piece of the eurozone crisis. They are also the easiest to fix.

In addition, Europe's leaders have to worry about the state of the public finances in the periphery economies: particularly Spain and Italy but also, increasingly, France. And they have to find a way to revive the real economy.

The economy, stupid

What the financial markets have apparently remembered in the past few days is that, by itself, the official solution to the sovereign debt problem (more and more austerity) makes the real economy problem even worse, at least in the short run. Reading recent press reports, they also seem to have discovered that savage spending cuts and tax rises can make governments really unpopular. Who knew?

Ok. I am being a little facetious. Financial markets aren't stupid - or not always. Investors knew there were a few holes in the programme to rescue the eurozone, and that there wasn't a lot of room in that new fiscal convergence treaty for stimulating growth.

In their hearts, I'm pretty sure that investors also knew that you couldn't get rid of economic problems that have built up over years by simply using the word "technocratic" a lot, and throwing money at the banks.

But for all that, I think there was a hope that with a fair wind, and some decent growth in the US and the core eurozone economies, European leaders would squeak by without another major eruption - in Spain or anywhere else.

That is still possible. But it's looking less likely than before, for two reasons.

One is economics. All that official lending for the banks has almost certainly prevented a major seizing up of the financial markets which would have been terrible news for ordinary borrowers. As we know, the cheap money has also eased funding issues for governments, as periphery banks buy their own government's bonds.

But, interestingly, there is NOT much sign that banks from other parts of Europe or the world's institutional investors have gone back to buying sovereign debt in a big way. The latest figures, for February, show that sovereign holdings by German banks, for example, have fallen slightly since November, while holdings by Spanish banks have risen by 68bn euros (£56bn; $89bn).

Nor is there much sign that the cheap liquidity, or the cuts in the official ECB policy rate, have filtered through to households and companies in the countries that need it most. As Marchel Alexandrovich from Jefferies, has pointed out, mortgage rates in Spain and Portugal are higher now than they were at the start of 2011 - half a percentage point higher in the case of Portugal, despite ECB rate cuts.

Outside the financial sector, companies are also paying more to borrow in these countries: borrowing costs for ordinary businesses have risen by 1.4 percentage points in Portugal and 0.8 percentage points in Italy.

Jefferies graphic of interest rate paid by companies

It's really too soon to judge the full effect of the ECB's actions on the amount of credit flowing through these economies. Monetary policy takes time to feed through to the real economy, at the best of times. But we can say they haven't seen much of an upside yet.

Talk of further rounds of fiscal austerity in Spain and the others does not help the situation. Nor do the latest jitters about the US economy - and China. (Though, when it comes to the US, the fundamentals do look better than they did this time last year, when the strength seen in the first few months of 2011 started to evaporate.)

Not so crazy

The second reason why the "squeak by" scenario for the eurozone now looks more difficult is a sudden outbreak of politics.

I say sudden. It's not exactly news that France and Greece are about to have important elections. But it is scary, for international investors. Or ought to be, when so few of the ingredients of a lasting solution to the Eurozone crisis are in place.

Like it or not, the Greek election, which we now know will happen on 6 May, will revive questions about whether Greece can stick with its new programme - or, indeed, the euro. But the election in France on the same day could prove more consequential.

Why? Because a victory for Francois Hollande in France would re-open the entire debate about austerity and growth, right at the heart of Europe.

The very phrase, President Hollande, could also (whisper it softly) cause investors to wonder whether France - the country with by far the highest government spending as a share of GDP in the eurozone - deserved to be borrowing at less than 3%.

We know what Nicolas Sarkozy thinks about fiscal austerity: he's in favour, at least when it comes to countries that aren't France. It's harder to predict where M Hollande will stand the next time that Spain decides to revise its deficit targets. Or what the German Chancellor will say in response.

We do know how investors are likely to react in the face of further arguments about the future direction of the eurozone, not to mention to further downward revisions to most European economic forecasts.

All of which is to say, those crazy financial markets may be on to something. I don't think the eurozone crisis is over, either. Spring fever in the eurozone

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 19.

    The fact is none of us knows what is going to happen. Not Steph, Robert, you and certainly not me. I've been looking at these blogs for a while now and seemingly educated, informed, 'ear to the ground' type dudes have been predicting the end of days again and again

    From what I can see, it just carries on .. having said that, the pensioner who shot himself (Greece) in despair may be a wake up call

  • rate this

    Comment number 18.

    It's difficult to see what individual countries can do. What they can't do to promote growth is to trash the value of their currency. The one element missing. The only hope is that the USA recovers strongly and the $ the worlds reserve currency appreciates. Otherwise they will have to wait until the whole EU is infected and the bond markets withdraw from the euro.

  • rate this

    Comment number 17.


    As long as France and Germany continue to protect their vast investments in the stagnant southern economies to the exclusion of everything else, the problem will remain etc etc....


    Surely you don't expect Germany this time round to give up control of Europe?. ;)

  • rate this

    Comment number 16.

    The key is France ;
    Germany cannot even begin to think of its beloved eurozone without France.
    And France dare not contemplate life without the EU.
    The EU cannot exist without Germany and France in a permanent embrace.
    Worst still France knows it.
    Call it "real politik" or even "emotional blackmail"
    The key remains France.

  • rate this

    Comment number 15.

    As long as France and Germany continue to protect their vast investments in the stagnant southern economies to the exclusion of everything else, the problem will remain. The Eurozone is now a liability to financial recovery throughout the world, not just in Europe. Dropping Spain, Greece, Portugal and possibly Ireland and Italy from the Eurozone may be the only solution.

  • rate this

    Comment number 14.

    Most definitely is not over. Europe, i.e. Europeans, whether through governments or individuals owe a lot of money to a lot of people who are increasingly reluctant to lend any more untl they are happy they will get back what is owed. That means reducing the size of the debt then proving you can pay up on future borrowing. It is bust, 15% interest rates or 10 years. Probably a bit of all three.

  • rate this

    Comment number 13.

    May not be over yet ? It hasn't even started.

  • rate this

    Comment number 12.

    Over? It's barely even begun. Papering over the cracks with bailouts and Quantative Easing was only ever temporary respite. The global economy is flooded with debt. Wealth is becoming more and more concentrated but with nowhere safe to put it. Fiat currencies, ever since the Romans first invented one, always collapse and this one is overdue, along with the demise of the infinite growth paradigm.

  • rate this

    Comment number 11.

    Perhaps the UK (and Europe) should do what Australia is doing inorder to enjoy a standard of living it's not earning. Sell the country (ie. Family Jewels) to China!

  • rate this

    Comment number 10.

    We have enough problems with our Girozone, never mind the Eurozone. Mind you our Girozone is probably easier to manage.

  • rate this

    Comment number 9.

    Nothing has been sorted since 2008. Our financial system does not allow contractions, as all money is, in fact, debt. With no growth, no new debt, no new money - apart from firing up the printing presses to fill the gaps. I advise googling 'money as debt' - the best and most informative hour worth of video to help you understand just what on earth is going on with our financial system.

  • rate this

    Comment number 8.

    The Eurozone is worse than any known ‘flu. Anyone inflicted with it has symptoms of abject poverty, depression, unemployment, reduced pensions, longer working hours/years if lucky to be in or find a job. Likelihood of recovery - years, if ever. It’s the ruination of countries which once flourished. Cure: Eurozone best avoided.

  • rate this

    Comment number 7.

    Everybody should watch the Keiser report on RT news if they want an honest explanation of whats really going on. The level of deceit and dishonesty is beyond words. I have pretty much made my mind up to use a trick I know to reduce JP Morgan shares into dust to punish them for their iniquities, Goldman sachs will go the same way. Sell up now whilst you still have chance.

  • rate this

    Comment number 6.

    All of the market data I have seen - including those in this article - suggest that the markets have gone from an unsustainable growth to an oscillatory solution. The oscillations can damp out, stay about the same, or oscillate out of control. Those who have money to invest - and there is plenty of it in China and held in Switzerland - must be very nervous of the third scenario.

  • rate this

    Comment number 5.

    When is anything over?

  • rate this

    Comment number 4.

    Did anyone with any sense ever believe that it were over?

    I'm only surprised that it has taken this long....

  • rate this

    Comment number 3.

    Of course its over, THEY have sorted the banks out, sod the rest of us!!!!!

  • rate this

    Comment number 2.

    Europe - including the UK - are not remotely out of the woods yet. Most countries are still in austerity mode, Greece is about to have an election and whose people are less than happy with their situation and the severe cuts, and could very well vote for parties that will promise them better days including those on the far left or right, neither of which are pro capitalist.

  • rate this

    Comment number 1.

    Why should it be over, they have taken a decade to build this madness


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