Davos 2013: Is the worst of the eurozone crisis over?

Closing down sale in Madrid Spain's economy still faces major problems

Is it all over? That is a question that will be lurking in the sidelines of the World Economic Forum in Davos this week - though I wonder who will be brave enough to say it out loud.

After three years of fearing the worst, there's a feeling among the movers and shakers here that the cloud has finally lifted. They are starting instead to hope for the best, despite a lecture from Christine Lagarde about the risks of a "relapse".

The optimism about the survival of the euro might be well placed. But the latest GDP figures from Spain, and the IMF's new forecasts for the region as a whole, are a reminder that the existential threat hanging over the single currency was only ever the most eye-catching element of the crisis in Europe.

Enormous economic problems remain, and in many parts of the continent, they are going to get worse before they get better.

The Spanish economy is now 6% smaller than it was before the crisis, and it is still shrinking. Today we found out that it had shrunk by another 0.6% in the last three months of 2012. That's the fifth quarterly decline in a row, and the worst since the spring of 2009.

You see the same tension in the IMF's latest economic update, which cuts the growth forecast for most European countries in 2013 and 2014, even as it talks about the increasing confidence in financial markets, and the fall in the cost of borrowing for countries like Spain since the old (higher) forecasts were written in September.

We have spent most of the eurozone crisis worrying about the great disconnect between the speed of financial markets - and the speed of Europe's politicians. Investors, it was said, wanted reform on a timetable that politicians could not hope to match.

But right now, I would say the problem is rather different. In the past six months, financial markets have shown themselves willing to give governments the benefit of an enormous amount of doubt. The question now is whether voters are willing to be equally patient, in waiting for the real economy to catch up.

ECB headquarters The ECB's pledge to stand behind eurozone governments has yet to be tested

There are those who find the financial markets' new confidence rather surprising. Why? Because - with one big exception - Europe's basic approach to resolving the crisis has barely changed since last summer.

The exception, of course, is that promise by the European Central Bank (ECB) to stand behind eurozone governments in trouble, under certain carefully delineated circumstances.

Optimists say that has turned the eurozone crisis from an existential crisis into a more standard financial and economic crisis, not so very different from the crisis that the UK and the US are still labouring to put behind them.

On this view, the eurozone has a lot of problems, but at least it does not now have the added problems associated with being a currency area without a true lender of last resort.

Perhaps. But, even if you think that's true. The ECB's promise has yet to be tested.

Many in Europe, including the Spanish finance minister and most German officials, would rather it were not tested. They think the success of the ECB's promise of "Outright Monetary Transactions" (or OMT) will be well demonstrated by it never having to be used. Failing that, they at least think it would be a very good thing if it did not have to be used this side of the German election in the autumn. Many in the ECB would rather not have to go through with it, either.

But the IMF and some in the financial markets (including at least one major ratings agency I have spoken to) take a very different view. They think the only way to really draw a line under the crisis is for Spain to be taken off the danger list.

And they think that will not happen unless it takes the steps needed to qualify for an official eurozone support programme (backed up by the ECB) - and actually gets one. Even if the funds themselves are never used.

This is a debate that is not going to get resolved here at Davos. But even the euro optimists can agree on one thing: Spain will be crucial to how this new, calmer phase of the eurozone crisis plays out.

Everyone can also agree that the reaction of ordinary voters to the economic pain that still lies ahead, for large parts of Europe, will be most important of all.

A positive, self-reinforcing cycle of confidence is now possible, with falling borrowing costs for governments eventually producing better real economic outcomes on the ground. Spain has seen its cost of borrowing fall by more than two percentage points since the summer. Interest rates have also fallen sharply in Italy and Portugal.

With luck, that will bring its own positive dynamic, and eurozone politicians will not face another "moment of truth" in the financial markets. But ordinary voters may have a long wait before the effects trickle down to them.

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

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  • rate this

    Comment number 159.

    Define "it"..

    Is it the mechanism by which some make easy money by others misfortune?

    Because that is how things used to be. Are we all waiting for those times to return?

    Otherwise we just have to accept privations handed to us by Gideon and his chums.

    Either way we are stuffed.

    But some want to be able to stuff more easily.
    And we are supposed to like it.

    Like "it" is a natural law?


  • rate this

    Comment number 158.

    The real test will not be Greece or even Spain. The real test will be France. As with Greece it will take time before the world awakens to the danger but when it finally blows up it will be huge. M.Hollande will keep the world's eyes fixed on the UK to keep the danger hidden.Will Europe be able to afford it? We'll have to wait and see.

  • rate this

    Comment number 157.

    I agree progress in Spain is crucial.
    A probable rise in the euro exchange rate, a consequence of trying to save the project, won't help.
    They need to concentrate on growth in the real economy. That won't happen until the suits learn the lessons of the past. Economies can't escape a liquidity trap without some external stimulus. If Governments, trapped by doctrine, won't deliver one, what will?

  • rate this

    Comment number 156.

    The worst is over? Recently we have witnessed serious rioting in Brussells, Brussells, Madrid... demonstrations in Portugal, soaring unemployment, bank insolvencies, loan defaults, bickering over membership, MEP sent to prison for fraud, and the Spanish and Italian economies are heavily in debt... Britain is on the brink of leaving... Greece isnt solved...

    Stupid or blinkered to think its over.

  • rate this

    Comment number 155.

    After three years of fearing the worst, there's a feeling among the movers and shakers here that the cloud has finally lifted.

    *** yeah right ***

    I believe you........

  • rate this

    Comment number 154.

    DC's chosen a safe topic, but he has a point.

    If all the taxes due were collected, then there'd be much more to spend on public investment and other stimulus.

    However, I've a feeling most would be handed straight back to his pals as tax cuts instead.

  • rate this

    Comment number 153.

    152.The finance houses have been jiggering the Euro for 5 years.

    The losers, victims of others' fraud & Central Banks' 'sudden death' rate hikes, the winners, insiders with ears & cash for dishonest whispers.

    Moral hazard, Merve-the-swerve? Yep, the hazard that Central banks & whole finance systems continues to be run like that
    Take the whole lot into public ownership. A Leader with Balls would

  • rate this

    Comment number 152.

    It was, from the very start, completely obvious that we shouldn't give the banks claiming to be losers a single penny.

    And NOT for the social darwinistic ultra free- market, Schumpeterian positions, that, thus, 'good' banks would emerge. They wouldn't, They'd be the 'winners' from the current debacle of fraud & insider information dealing. (Toxic CDS debt etc)

    Public ownership of strong & weak!

  • rate this

    Comment number 151.

    As soon as the likes of Moodys and Standard & Poor stop putting out warnings about maybe having to downrate something, traders stop panicing and things get back to 'normal' quite quickly. As I suspected all along, their unhelpful speculation does more harm than good.

  • rate this

    Comment number 150.

    The Spanish economy still has a long way to go. Rajoy reckons that the first half of 2013 will be the worst and plenty of Spaniards agree with him. If you've still got big economies like Italy, France and Spain struggling I don't see how the Eurozone can come out of its crisis.

  • rate this

    Comment number 149.

    Can we have the official Clapometer scores please?

    Who received more applause ...

    ..the PM for his speech?

    ..or SF for her question?

    Excellent speech, PM ...

    ...and very good question SF, you certainly got yourself noticed, even Sky news promptly picked up on your sharp, insightful intervention, choosing not to comment on the other very good audience questions, in your favour !

  • rate this

    Comment number 148.

    David Attenborough for president of the EU, I could live with that, as perhaps could the children of tomorrow. May the light of Mr Attenborugh shine through these dark days and illuminate, for all, what is truly important.

  • rate this

    Comment number 147.

    5 Minutes ago
    Germany and France are playing the long game
    Strange thing is that both of these nations populous are very nationalistic and will not take to being directed by Brussels. For up to now both generally ignore the EU directives or at best pay lip service to them. Were they to be enforced then the people would be on the streets.

  • rate this

    Comment number 146.

    Highlight of Davos PM speech Q&A

    PM: Lady at the back, next.

    SF: Stephanie Flanders, BBC

    PM: er...ugh

    Lurking in the shadows at the back of the hall Steph ... nice tactic to get your questionn in

  • rate this

    Comment number 145.

    23 Minutes ago
    The crisis has always been one of sovereign debt,

    If you are talking about the Eurozone crisis then it is about the lack of fiscal unity and control that is why there needs to be a federal state governing all the Eurozone countries. One Government under single control and that means further integration and a distinct move of powers to the centre.

  • rate this

    Comment number 144.

    How many Britons are prepared to follow their supposed leaders into oblivion, hands up please. For all those that would, may I suggest that you are not following at all, you are being pushed, manipulated, used and lied to. I fear that 20 yrs on from the start of this present government, we will have been denied as much as 20% of our democratic RIGHTS, every 4, 5, 6, 10, years, then never. Be wary.

  • rate this

    Comment number 143.

    Germany and France are playing the long game with regard to the future of the EU; the objective is an United States of Europe with Germany and France in the driving seat. We are at war with them but the weapons are now economic rather than armaments. Sanctions, tariffs etc. are the new weapons of war.
    The Euro and the United States of Europe will fail. We will then revert to a Common Market.

  • rate this

    Comment number 142.

    Stephanie, sorry but you've missed the real Davos story . This is where all the big Bankers are out in force, this week.

    It's not old news, who is addressing the banks? The Libor rigging scandal, rogue trading, mis-selling, the breaking of anti-money laundering rules, exec bonuses. Banks were once again at the bottom of the Edelman "Trust Barometer", released this week.
    Keep the pressure on!

  • rate this

    Comment number 141.

    113.Andrew Morton
    The traders have only taken a short break normal service will resume normally. Figures out of Spain and Italy have only got worse which is causing some concern. the issue is which one to pick its like a smorgasbord. As far as non of the PIIGS leaving the EURO why would they for they may well as stay under the cow suckling for as long as they can.

  • rate this

    Comment number 140.

    Is the worst over, in short, no, and do not let anybody cinvince you that it is, simply by repeating it over and over. Anybody remember the green shoots of growth that kept on sprouting out of Norman the mountains mouth in the nineties. It didn't save the Tories back then and you would have to repeat it many times in many different languages. Apparently money talks, but all I hear is silence.


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