Things
seem to have gone very quiet around the euro currency in recent months. It
appears to have found some much needed stability after years of extreme market mayhem
with its very survival on the line at times as the euro zone has lurched from
one crisis to another.
This
new-found stability is deceptive. The currency is not out of the woods in terms
of deep rooted economic and political problems, which threaten to resurface as the
euro zone stands at the threshold of another global economic slowdown. It could
mark the quiet before the storm.
It
is an accident waiting to happen. If the euro zone heads into another downturn,
it will only heighten frictions caused by the growing wealth gap between
prosperous Germany and the economically distressed nations of southern Europe,
especially Greece, Spain and Portugal.
Damage
caused by years of chronic austerity, rampant unemployment and crippling debt
threatens to pull European Monetary Union apart at the seams. If the euro zone
slips back into recession and employment conditions worsen, those tensions will
boil over again very quickly.
In
the last two years, euro zone economic confidence signals have been
surprisingly upbeat, but not anymore. The euro zone’s bellwether economic sentiment
index deteriorated sharply in January, pulled down by mounting pessimism being
felt in industry, services and among consumers. It spells trouble ahead for
euro zone growth.
Worries
about the weakening global outlook are forcing European businesses to shelve
investment plans and rein in output intentions. Consumers are shying away from
spending, fretting about job prospects, the squeeze on wages and damaged wealth
expectations thanks to the collapse in equity values since last year.
Even
with the European Central Bank’s monetary generators running at full throttle,
the boost from negative interest rates and copious amounts of quantitative
easing appears to be losing impetus. The ECB already recognises it needs to
step up its stimulus efforts in March.
The
euro zone was created leaving too many structural anomalies and internal
inconsistencies. The economy was supposed to be a level playing field, with the
single market and monetary union designed to boost prosperity as equitably as
possible across the 19-member area. But this has clearly not happened.
The
euro zone has ended up a two-cornered stool, prone to tipping over in times of deep
market instability. What it has lacked is a vital policy prop from full fiscal
union acting as a market stabiliser and as a spur for fairer resource redistribution
throughout the euro zone. Germany has always been bitterly opposed to European
Fiscal Union, frightened of ending up having to foot the bill.
The
global financial crisis in 2008 laid bare these fatal flaws and exposed striking
divergences of economic performance. Through ups and downs, Germany has simply
got more prosperous, while the weaker economies like Greece, Spain and Portugal
have fallen further behind and into hard times.
EMU’s
fixed currency regime has condemned weaker nations to lag Germany’s
capital-intensive, productivity-driven economy, forcing them into self-enforced
domestic deflation, with lower wages and higher unemployment as one way of
staying competitive. Before EMU, weaker economies resorted to currency
devaluation to keep up with Germany. Locked into the euro, this option is now
ruled out.
Since
the financial crisis, Greece and Spain have made some progress on improving
competitiveness, but only at a terrible price to their economies. In both
countries, around one in 4 workers is without a job, while youth unemployment
stands around 50 per cent. It is unsustainable in the long run. Breaking point will
soon be reached and countries will eventually vote with their feet.
It
is already happening with many European voters turning away from mainstream
politics to anti-austerity protest parties like Greece’s Syriza and Podemos in
Spain. Once voters make the connection between anti-austerity and anti-EU, euro
sceptic sentiment, the single currency will be in trouble.
2016
will be cathartic year for the euro zone’s future, especially as Britain
squares up to a momentous referendum to stay in the EU. If Britain quits the
EU, it could set a dangerous precedent for EMU countries to make a similar
choice about staying in the euro.
Once
one country decides to leave the euro, it will be the beginning of the end.
Domino effects will take-over as more countries make the choice to live in a
freer, multi-currency world.
It
would mean game-over for the euro and mark a return for Greece’s drachma,
Spain’s peseta and Portugal’s escudo. Others will follow.
