Is the eurozone saved?

ECB logo Are the euro area's financial woes history?

With Portugal joining Ireland and Spain in announcing that it no longer needs a bailout from the International Monetary Fund and the eurozone's rescue mechanisms, the question arises whether the euro area's financial woes are history.

Is the euro-area now sound as a pound (so sorry for the inappropriate metaphor)?

Well if you are a risk-loving canny investor, it has been a wonderful few months to be buying the debts of financially stretched euro-governments.

According to Bloomberg data, buyers of Spanish bonds would have made a 10% profit over the past year and holders of Portuguese government bonds would have made a 17% return.

The best investment of all were the bonds of the financially mullered Greek government, which has delivered a lip-smackingly tasty 55% profit over 12 months.

Which means that the implied cost for the Portuguese government of what it has to pay to borrow (the yield on its bonds) is almost as low as at any time in its history - and the interest rate that investors demand that the more financial stretched euro governments in general pay to borrow is remarkably close to what they charge mighty, solid Germany.

Or to put it another way, the institutional investors and hedge funds which three years ago were dumping eurozone assets as though they were infected with plague currently think the risk of Portugal, or Spain or Ireland going bust, or of the eurozone falling apart, is de minimis.

So everything must be tickety boo in Euroland again, surely.

Well not for the almost 12% of eurozone citizens who are unemployed, given that - according to the OECD's new forecast - that rate is set to fall only marginally in the coming 18 months, to a still-high 11.4% in 2015 (and in Spain the unemployment rate is almost 26%).

What still appears seriously wrong in the euro area is that meaningful economic growth remains elusive.

The OECD today forecasts growth of GDP or output in the eurozone of just 1.2% in the current year - which compares with a forecast of 2.6% for the US and could turn out to be a third of the rate at which the UK economy may grow this year.

And even by 2015, the OECD expects the euro area to be growing at just 1.7%, more than two percentage points less than the speed at which it expects the global economy to expand.

Here is the point: thanks mainly to the European Central Bank's repeated promises to take (largely unspecified) measures to prevent eurozone Armageddon, there is a good deal more financial stability in the eurozone, but that stability should not be taken for granted.

The immediate risk is of considerable political turmoil. All over the eurozone (and in the UK too, of course), the sense among citizens that their leaders are not delivering prosperity has seen a dramatic rise in the popularity of Eurosceptic parties of left and right.

We will know the magnitude and significance of that advance when we get the results of elections for the EU parliament later this month.

But if the eurozone's electorate becomes yet more disenchanted with the region's integrationist elite, it will become much harder for the currency union to adopt reforms widely regarded as necessary to stave off future disaster.

There has been plenty of hardship foisted on citizens in those countries where current account and trade deficits became unsupportably wide and government debts spiralled out of control.

But there is, as yet, very little of the political integration among member countries to prevent those sorts of dangerous imbalances reoccurring: there is very little direct central control on the spending, taxing and borrowing of eurozone members.

And although new institutions have been created to provide succour to eurozone governments and banks when things get hairy, the resources available to them are limited - largely because the solidarity of deep-pocketed Germans with the rest of the euro area remains minimal.

None of which is to belittle the current exercise by the European Central Bank to strengthen the eurozone's anaemic banks.

But it is to say that one-off rescues should not be confused with long term structural improvements.

So, for example, the common funds for rescuing banks are trivial compared to potential long-term needs. And the cost of insuring the deposits of eurozone banks continues to fall on individual governments - which means that in any future market crash, the finances of a weak government and its weak banks will remain lethally inter-connected.

Don't take my word that the eurozone's waters are not remotely shark-free.

Even the world's most constitutionally bullish investment bank, Goldman Sachs, has recently published a report on what makes a currency union sustainable. Goldman's conclusion: "Whether the changes that are being implemented will make the euro area's institutional structure sufficiently robust to deal with a future crisis is questionable."

Or to put it another way, if the euro-area's leaders will not or can not use the current financial calm to push through a harder and more controversial political overhaul - which would inevitably see power shift from nations to the centre - then we may not have to wait many years to revisit potential euro catastrophe.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 253.

    Please explain"

    We will be 'banker-led' blinkered to the end, our moment of capitulation coming I fear too late, past the precipitation of folly greater than Depression or War, Epidemic or Plague, something that causes the TV screens of survivors to go blank, coming back to life only with calls for reason and care, in partnership, as equal citizens & stewards, at last.

  • rate this

    Comment number 252.

    247. Information Overload

    I'd be more interested in hearing from someone who had the vaguest clue what they were writing about.

  • rate this

    Comment number 251.

    250. John_from_Hendon

    The point of my post was to express doubt that the Euro has been saved. What possible basis have you for inferring that I like "being mugged by bankers".

    My opinion of modern banking is about as low as I would imagine yours to be.

  • rate this

    Comment number 250.


    What you do not seem to get is that when businesses trade in different currencies that results of their commercial activity is stolen by bankers. You obviously like being mugged by bankers.

    Please explain why?

  • rate this

    Comment number 249.

    So many of you are taking the pro-banker line. Why?

    Currencies are a means of settlement of trading in goods. The terms strong and weak are banker terms (and so the opposite of what is good for trade.)

    The easiest way (safest way, most profitable way) to trade is to do so inside a single currency block. Anything else and the bankers rob you.

    The UK is a banocracy so the bankers rob us all.

  • rate this

    Comment number 248.

    @ 224. margaret howard

    "They could have left but bravely decided to suffer the consequences and recovery is their reward"

    Hard to leave it without a countries politicians giving you a democratic referendum, and that isn't going to happen in the EU.

  • rate this

    Comment number 247.

    246 Knut Knutsen

    My information was from last night, 2014 - not 2008 nor 2009 that you used in your post

    We could all take a pick from any year. However, it won't change the speculative nature of currency trading that affects the value of the pound in our pocket and our cost of living..

  • rate this

    Comment number 246.

    241. Information Overload
    "The pound has risen against the dollar"

    Does depend what starting point you pick.

    14th March 2008 £1 = $2.02

    23rd January 2009 £1 = $1.37.

    Take your pick, but my original comment was about the Euro Pound exchange rate and not the Dollar.

    As 237. Wiltshire_Lad hinted it only really matters when you are going on Holiday, or want to trade with other Countries.

  • rate this

    Comment number 245.

    Has the Euro been saved? More likely the BBC has finally abandoned all pretence at impartiality and has come right out of its EU fanatics closet.

  • rate this

    Comment number 244.

    Who thinks the Eurozone was ever in any danger?
    Our Political Leaders created the Eurozone.
    They are all innocent. This hiccup is not their problem.
    It is your problem.
    But they do appreciate your vote.

  • rate this

    Comment number 243.

    Not many years ago you would get 2.57 dollars to the pound , now it's 1.67 dollars too the pound . Recently the pound has risen by 5% against the dollar and as petrol is paid for in dollars should mean the price of fuel falling by 3pence a litre . The euro is set to become stronger and the news of its death was greatly exagerated .

  • rate this

    Comment number 242.

  • rate this

    Comment number 241.

    235 Knut Knutsen

    The pound has risen against the dollar. The highest for five years. The Euro stands at about 83 cents against the pound. Of course, these figures are fluctuating all the time due to money market locusts' speculations on their computer programmes with their feet on their desks watching their commission growing..

  • rate this

    Comment number 240.

    232 Ken

    "Thankfully the UK is out of this currency and has control via the Bank of England"

    And like the dollar, is on the slide. Meanwhile the Bank of England believes printing loads of money a la the Weimar republic, is the way to go, plus encouraging people to believe their houses are reliable assets rather than places where they and their families have to live in.

    What a shambles

  • rate this

    Comment number 239.

    231 Walt

    "Greece, its a Country where their main industry"

    12 m people relying on tourism is not sustainable, especially as young educated people don't want to become waiters or barmen.
    Neither was the former olive oil and donkey economy.

    The people know it otherwise why did they cook the books to be allowed to join the club? Or why don't they leave?

  • rate this

    Comment number 238.

    233 ToryBoy,
    Have a read about the current crop of chiefs, Barroso, Van Rompuy, Schulz and tell me that they are not Left wing socialist. The objective of the EU is to create a happy family the 'United States of Europe', controlling all the member countries and their economies. Merkel and right wing politicians will have to toe the line to whatever Brussels tell them.

  • rate this

    Comment number 237.

    235.Knut Knutsen

    Today £1 is worth €1.21.

    Sterling has fallen against the Euro.


    I am going to Italy on holiday in a few weeks so I expect Sterling to fall further.

  • rate this

    Comment number 236.

    Saved from who ? ,.G,.o,.l,.d.m,.a,.n advised Greece.
    Banking needs more regulation not less.

  • rate this

    Comment number 235.

    In 2007 £1 was worth €1.5.

    Today £1 is worth €1.21.

    Sterling has fallen against the Euro.

    But who needs simple facts when you can just rant.

  • rate this

    Comment number 234.

    Is it true that they advised the Greek government how to 'fiddle' the national accounts to enable them to join the Euro?


    I doubt that the Greek government needed any help in that department


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