Debt crisis: Europe survives the year
21 December 2012
The year 2012 seemed pretty dangerous for the eurozone and the whole of the EU. But the worst did not come to pass, especially since Angela Merkel made concessions, which allowed Mario Draghi, President of the ECB to intervene. However, in 2013, Europeans will still have to remain vigilant.
“Forget the Mayan calendar: it's in Berlin where Cassandra will be vindicated or refuted.” So concluded my final column of last year. It seemed like a forecast, but it was not, as it allowed two completely opposite finales.
Nor did it reveal anything that we did not already know, because we had been aware for some time that all roads led to Berlin (although with a stopover on the way in Frankfurt, headquarters of the European Central Bank). If recalling it is worth anything, it serves to remind us how close we were to the abyss and so helps us understand where we are now.
Throughout 2011, a lethal combination of hesitation, prejudices, myopia, lack of leadership, divisions between countries and a maddening slowness managed to turn a deep economic crisis into an existential crisis that put the survival of the euro in question. In extremis, the European Central Bank flooded the market with liquidity, which eased the problem temporarily but did not solve it.
True, the German chancellor, Angela Merkel, aware of the gravity of the crisis, had publicly acknowledged in November (2011) that “if the euro falls, Europe falls”. However, her deeds fell far short of convincing anyone of her determination to take that rhetoric to its logical conclusion. This explains why, in the first half of this year, some traders stopped speculating about the financial survival of the euro and started to make preparations for its collapse.
Doing whatever it takes
The perception that the financial markets were beginning to redenominate debts calculated in euros to debts into national currencies, thereby foreshadowing the day after its collapse, was the red line that drive the ECB to act and, at the same time, the argument that the German government needed to overcome the resistance of those in Germany who still believed that Spain and Italy would have to survive on their own or leave the euro.
With his resounding statement in July affirming his intent “to do whatever it takes and, believe me, it will be enough,” to which he added in September a debt purchase programme that brought credibility to that declaration, Mario Draghi has earned the well-deserved title of Man of the Year. And rightly so, because from that moment on any financial trader who decided to speculate on the collapse of the currency knew that that would be a losing position from the start.
But, as is sometimes said, behind every great man there is always a woman (hidden, or a surprise?). In this case, Chancellor Merkel, who after having dragged her feet for months and even having fed the scepticism in her own country with unfortunate statements about southern Europe, she decided to confront the German Bundesbank, which voted against these measures and to ignore the hardliners in her own party who were reluctant to accept any kind of commitment to public or private debt (bank debt), and to accept, in the first place, the bailout of Spanish banks and ECB intervention to relieve the pressure on the risk premium on Spanish and Italian bonds and, in the second place, to start talking about a banking union. And so, between June and September 2012, the euro was saved. That's the year's good news.
Not out of the woods yet
The bad news is that although the euro has been saved, and the eurozone countries as well – not to mention the fact that a Greek exit, which after months of speculation, now seems extremely remote – what lies ahead remains extremely complicated.
As demonstrated by what happened to the plans for a banking union, which were reduced, held up and cut into pieces over successive summits. European policy – if one overlooks the great uncertainty – has gone back to its normal course.
And so the exasperation at the lethargy, the myopia and lack of political courage returns. If we all know at this point what needs to be done, it is tough to explain why it is not being done. And meanwhile, the Angela Merkel who took the lead for a few days was again reverting to the narrowness that marks the national agenda, dominated by elections, reminding us that butterflies spend most of the time in a dull and ugly chrysalis and for only a very small part of their lives astonish us with their flight and their colours.
Still in the desert
The year 2013 will be a year of transition in which two contradictions will dominate: on the one hand, the feeling of having left the abyss behind us, which is visible in the lowering of the risk premium and the decision of the Spanish government not to ask for a bailout; but on the other, the impossibility of denying that the adjustment policies are still not working and there will be no external stimuli to let us grow and create jobs.
We are still alive, but in the desert, and with very little water.
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