A Eurozone that has lost its bearings in a world without certainties
A year ago, most financial analysts believed that the real surprises in 2014 were going to come from the eurozone. After years of neurotic, searing crises that seriously endangered the survival of the euro, a comeback was now on the cards. Well, twelve months on and the euro sector is still in the same perilous predicament.
- Wednesday, 31 December 2014
There have been steps in the right direction, particularly in relation to shoring up the banking system and guaranteeing macroprudential oversight. But all these achievements can essentially be ascribed to the work of the European Central Bank (ECB). It’s not enough. More will have to be done to dig ourselves out of the quagmire.
At the end of 2013 any mention of the Eurozone and a smile would creep into any international investor’s eyes. The same reaction was shared by money managers or hedge fund directors. “Next year will belong to the eurozone, no doubt about it”, one of them told me. After the first five months of the year he seemed to have got it right. The flow of foreign capital towards the euro area was steady and robust. Then it slowly began to dry up. For three main reasons: political uncertainty, exceedingly low inflation and the ECB biding its time. The broker’s trust began to fade, and it’s been fully restored. Best to look for profits elsewhere. Because although the emergency is over, the vulnerability of the euro area is still so extreme that as things stand it is impossible to plan long term investments.
The Eurozone lost its bearings five years ago, when Greece suffered a political crisis which then spread to its financial and ultimately to its economic systems, without any chance of reverting the trend. The decision-making short cut between European institutions was one of the reasons why things got worse, but in those darkest days something clicked. The European Commission stopped applying exclusively standard models to its thinking while the ECB, under Mario Draghi, voted in favour of exceeding its mandate’s restrictions by adopting an unusual monetary policy. This was how things panned out and the current integrity of the Euro is entirely due to these actions, not just article 50 of the Lisbon Treaty which effectively only governs leaving the European Union and not the eurozone.
So what can we say know about all those forecasts? The low inflation is no longer restricted to the periphery of the euro zone area, but is also affecting its core. Germany, that was supposed to drive the other member states along with it, is now also in trouble. Italy is once again in recession despite the initial forward-looking efforts, or at least intent, shown by its young new Prime Minister Matteo Renzi. Spain, having crept out of the headlines a few months earlier, is having to deal with the rise of Podemos, the better organised and less boisterous version of the Italian 5 Star Movement. François Hollande’s France, oblivious of its president’s rock bottom popularity, is still convinced that it is immune to the crisis without realising the enemy is at its doorstep. And then there are the other member states, all Sovereign states that want to make their vote count and their voice heard at European meetings. A quick look at the probable operative implementation of the investment program launched by the European Commission President Jean-Claude Juncker is all it takes to realise how deep the rift between the various countries is. Some have no room for further taxation and want to be entitled to increase its public spending, like Italy. Others, which have that room, like Germany, are not prepared to expand because its European partners haven’t introduced the structural reforms they’d promised years earlier.
There’s only one player trying to stop the rot. That’s Mario Draghi’s ECB. Initially with the Targeted long-term refinancing Operation (TLTRO), then with the introduction of covered bond, Asset-backed security (ABS) and Residential Mortgage-backed Security (RMBS) acquisitions. All measures designed to loosen the purse strings and hence its operating risk by about 1,000 bn euro. And if this were not enough, it has undertaken to do more. What? Exactly what the Federal Reserve has been doing since 2008 and the Lehman Brothers collapse, meaning the introduction of Quantitative Easing (QE) which includes the purchase of government securities. But then what? Beyond that what can the ECB legitimately hope to do to save the eurozone? Absolutely nothing.
Any real solution can only stem from the individual member states. Draghi has been saying so for months: “Without state support, the EBC cannot hope to find a solution to the crisis”. He’s right. Without a strong and firm stand by Rome, Paris, Berlin and Madrid and all the others, there’s no way out of the quicksand. To grow one has to suffer and commit, even be prepared to bash one’s head against entrenched positions and vested interests, so exceptional before as much as they are protected today. If one is going to experience political annihilation, one might as well make sure that these reforms are capable of turning tired, edgy countries on their heads, countries that have lost the desire to think of the future with the kind of positive drive experienced in the post-WWII period. This is not the case just in Italy, but also in France and Germany, because were not facing just a temporary crisis, or one affecting just a few countries. No, this time round all the production factors of the developed economies are on the line, and failing to see this only means prolonging the agony. Either the member states take action or their fate is sealed. The time for announcements is over.
In a world that has lost its bearings and all belief, how can a eurozone hope to survive if it continues to quarrel and can’t muster a long-term vision? It won’t. So we have to own up to it, however much it hurts. We should shelve any expectations we have for 2015. We’ve witnessed at our own expense how the expectations for 2014 were betrayed by the slackness displayed by many countries, including our own. I know it’s painful and perhaps humiliating, but when faced with total uncertainty, perhaps it’s the best way to avoid more surprises.