The possibility of a breakup is at its highest for two yearsby Wolfgang Munchau / November 10, 2014 / Leave a comment
The German economy has transformed itself through economic reforms. Mario Draghi, President of the European Central Bank, ended the eurozone crisis with a promise to support the euro in all circumstances. Spain goes through a miraculous economic recovery. The threat of a breakdown of the eurozone is averted.
We can tell ourselves these and similar stories over and over again. Most people believe them. They have become part of the standard narrative. But as plausible as each one of those statements may seem, they are all wrong.
The real story is that the eurozone fell into a recession in the fourth quarter of 2008, and has been stuck there, more or less, ever since. When recessions last that long, they do real, lasting damage. Many of the young people who have not worked in the last six years, may not work in six years’ time either, if ever. The recession has permanently reduced the productive capacity of the economy. Investment rates have fallen, as member states are struggling to meet the fiscal rules of the monetary union. A fall in investment today means lower growth tomorrow. And lower growth tomorrow traps the public sector in Greece and Italy and the private sector in Spain and Portugal in a debt trap. The eurozone’s existential crisis is economic. It is not just financial.
What is widely known as the eurozone crisis of 2010-12 was only the financial crisis. Investors pulled out of bond markets, drove bond prices lower and interest rates higher. That specific crisis ended with the lender-of-last resort guarantee by Draghi in 2012. That guarantee encouraged banks and global investors to come back, thus stabilising the sovereign debt markets.
By 2013 the world had already moved on. At the annual meetings of the World Bank and the International Monetary Fund in October 2013, the eurozone had ceased to be the central topic of conversation. Everybody talked about China, and about how the United States will normalise economic policy, by ending its programme of quantitative easing. A year later, in October 2014, the situation reversed. The eurozone was back in the dock.