The Challenge

The ECB’s continuing program of bond purchases and its emergency lending to struggling banks show the underlying instability of the eurozone.

 

A decade after the outbreak of the euro-crisis the public deficits of all member-states are now back below the 3 per cent of GDP laid down in the Maastricht Treaty. Current account imbalances within the currency union have also been sharply reduced and unemployment levels are close to pre-crisis levels, and below those levels in some member-states, such as Germany and the Netherlands.

Nevertheless, the eurozone still faces serious risks. Public debt remains at close to 100% of GDP in France and Spain and over 135% in Italy. Current account deficits may have been reduced, but to a large extent this reflects weak domestic demand (and hence imports) rather than sustainable economic rebalancing. Despite years of historically low official interest rates and a large program of government bond purchases by the European Central Bank (ECB), the eurozone’s eurozone recovery since the crisis has been weak, and inflation remains a long way below the central bank’s target of ‘below, but close to 2%’.

Moreover, economic growth has weakened sharply over the last year, raising the possibility that some eurozone economies could fall into recession before they have properly recovered from the previous one. In response, the ECB announced in September 2019 that it would restart its government bond purchases and continue lending to cash-strapped banks under its ‘targeted longer-term refinancing operations’ (TLTROs).

The biggest challenge facing the eurozone is that the members of it disagree over what reforms are necessary. On the one hand, many people in countries such as Germany and Holland fear being pushed into a transfer union that they did not vote for and are bearing the costs of excessively loose monetary policies needed to keep badly run southern eurozone economies afloat. For their part, many in countries such as Italy maintain that they are paying the price for the eurozone’s failure to accept that a stable currency union requires a degree of political integration. They argue that market harmonization and integration alone is insufficient to guarantee convergence and avoid self-reinforcing market panics that have done such damage to their economies.

 

Read Part 2: Europe beyond markets: What went wrong?

Read Part 3: Europe beyond markets: New Economy in Progress

References

  • Jean Pisani-Ferry, ‘How to ward off the next recession’, Project Syndicate, September 2019.
  • Understanding the political economy of the Eurozone crisis’, Jeffrey Frieden and Stefanie Walter, Annual Review of Political Science, 2017.

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