Brace yourself for the next phase in the eurozone crisis, due to come around any time soon. That might seem an odd thing to say. After all, Portugal has just emerged from its bailout programme; Greece has dipped its toe into the bond market; while Ireland's export-slanted economy is growing at a fair lick. Crisis over, you could say.
But hang on a minute. All is not well in Europe, as the votes for fringe and extremist parties in Sunday's European parliament elections will testify. There are five good reasons why the crisis could flare up again at any time.
Problem one is that growth remains painfully weak. Across the 18-nation single currency zone as a whole, activity increased by just 0.2% in the first three months of 2014. That was disappointing in view of the unusually mild winter, and would have been even worse had it not been for the strong 0.8% expansion in Germany.
Problem two is that weak growth is no longer confined to the euro's fringe. Italy's performance has been woeful ever since the creation of the euro a decade and a half ago, and the 0.1% contraction in the first three months of 2014 was the 10th decline in the last 11 quarters. The Netherlands posted an even bigger decline of 1.4%, but the biggest problem of all is France, which has failed to deliver two consecutive quarters of growth during François Hollande's presidency.
This matters not just because of its impact on France, where one in eight of the working population is jobless, but because of the gap emerging between the eurozone's two biggest economies.
Over the past 50 years, the smooth running of Europe has relied on the Paris-Berlin axis, but strong growth in Germany and weak growth in France complicates matters. Hollande clearly wants the European Central Bank to pull out all the stops to boost growth; Angela Merkel will favour a more cautious approach.
The third problem is deflation and its impact on heavily indebted eurozone countries. The cost of living is rising by less than 1% a year across the eurozone, but the average masks the fact that certain countries, such as Greece and Spain, are already experiencing falling prices.
What that means is that the real value of those countries' considerable debts are increasing. At some point, financial markets are going to cotton on to the fact that weak growth plus deflation equals unsustainable debt-to-GDP ratios, and bond yields will start to rise once more.
The fourth problem is Europe's zombie banks, which have been kept alive thanks to support from the European Central Bank but have proved unable, or unwilling, to provide the credit to businesses and households that would push the eurozone's nascent recovery on to the next level. Without a functioning banking system, the risks of a relapse are high.
Finally, there's the threat posed by the trouble on Europe's eastern borders. The tension between Ukraine and Russia will almost certainly result in both countries suffering recessions this year. So far, the impact on neighbouring countries, such as Poland, has been limited by the solid performance of Germany. But Sunday's presidential election in Ukraine, together with signs that Germany is coming off the boil, could feed through into weaker business and consumer confidence.
Mario Draghi is doubtless aware of all these threats. He knows the crisis could re-erupt at any time. So do the financial markets. That's why it is put up or shut up for the ECB when it meets early next month.
Draghi has been an absolute master at manipulating markets simply by talking to them. Now he needs to cut rates, announce a plan to boost credit in those countries where its flow is most impaired and signal that he is prepared to announce a fully fledged quantitative easing programme should the deflationary threat not abate.
No comments:
Post a Comment