Since last summer, the euro crisis has apparently abated. Optimists have believed that it has finally been laid to rest.
The more cynical among us have thought this particular parrot was merely sleeping. All along, despite the markets’ quiescence, the fundamental economic problems which underlay the crisis have failed to improve.
And then last week the crisis flared into life again. Portugal’s finance minister resigned , citing, among other things, a decline in public support for the austerity policies the government has adopted in return for its bail-out. He was followed by the foreign minister.
While the coalition government will probably hold together, the latest developments have highlighted growing rifts over austerity policies. The chances of the government lasting until the end of its term (October 2015) seem pretty slim. More importantly, these events reduce the chances of the government successfully exiting its bail-out.
Meanwhile, it has become clear that Greece is in trouble again. Actually, the economic numbers have recently improved. The reduction in the budget deficit even appears to be running a bit ahead of schedule.
But the Troika (the IMF, the ECB, and the European Commission) is, once again, increasingly concerned that Greece is failing to implement the reforms demanded of it. In particular, that it is backsliding on the targeted reductions in public-sector employment.
If it remains dissatisfied with Greece’s progress, then at today’s Eurogroup meeting, eurozone finance ministers will be unable to sanction the release of the next loan payment from the European Stability Mechanism (ESM).
Since eurozone finance ministers are not scheduled to meet again until September, a failure to sign off the latest loan disbursement could mean that Greece has to wait another three months until its next ESM loan is disbursed, potentially leaving her unable to meet a €2bn (£1.72bn) bond redemption in August.
What’s more, the IMF has voiced concerns that the current bail-out may not fully cover Greece’s financing needs for the next 12 months. Unless this hole is filled, either by Greece or the eurozone, the Fund could also suspend its loan payments.
Even if Greece bows to the Troika’s demands, the government’s wafer-thin majority in parliament suggests that it may struggle to implement these measures.
Now both Portugal and Greece are relatively small economies. Although their economic position is dire, it is quite easy to imagine some sort of euro fudge which enables them to get their money somehow, thus postponing the denouement. The German chancellor, Angela Merkel, calls the shots. For her, it is most important to put any crisis off until after the elections in September.
Meanwhile, the other peripheral countries remain in a bad way. Italy is deep in recession. In the first quarter, GDP was 2.3pc lower than a year earlier and 8.7pc below its Q3 2007 peak. It looks as though the economy will contract further this year.
Last year, the Italian budget deficit was just 3pc of GDP. Based on misleadingly optimistic GDP forecasts, the government expects the deficit to edge down slightly this year. By contrast, I expect it to rise to about 4pc of GDP. By 2015, public debt will probably exceed 140pc of GDP.
Admittedly, at just over 12pc, the unemployment rate is low by the standards of other peripheral economies. But, if anything, the labour market downturn appears to have intensified recently.
Spain shows some definite signs of improvement. Since the beginning of 2010, exports have risen by 18pc, as fast as exports from Germany. But unemployment is almost 27pc. Moreover, public debt, at 84pc of GDP last year, looks set to rise above 100pc by the end of 2014. Further sharp falls in domestic spending seem likely and banks’ bad loans look set to rise, too.
Ireland (Other OTC: IRLD - news) , the poster boy for the euro-zone’s austerity drive, has recently suffered something of a relapse. In Q1, GDP fell for the fourth time in five quarters. The main reason behind the recovery fizzling out has been a slowdown in the external sector.
This suggests that Ireland’s apparent improvement in competitiveness whole economy unit labour costs are 16pc below their peak has either not been quite what it appears, or the benefits have been swamped by a slowdown in demand in its major export markets. The unemployment rate is still over 13pc. What’s more, with the budget deficit over 7pc of GDP last year, yet more austerity is to come.
Although there have been improvements in some of the peripheral countries, the most striking recent development has been the deterioration in France, which has officially re-entered recession after 18 months of stagnation. Moreover, it has recently lost a good deal of competitiveness, not just against Germany but also against the peripheral countries. And the continuing high budget deficit implies the need for more austerity.
What we are witnessing across the eurozone is the reassertion of economics over euro-politics and the power of the fundamentals over Draghi’s clever wheeze of so called Outright Monetary Transactions (OMTs).
Some wag once quipped about the Holy Roman Empire that there were only three things you really needed to remember about it: that it wasn’t Holy, it wasn’t Roman and it wasn’t an Empire. Similarly, OMTs are not Outright, they are not Monetary and they are not Transactions.
What’s more, as the OMT facility is currently set up, the ECB is unable to buy the bonds of Spain and Italy, the two largest peripheral countries and the ones which could pose the greatest trouble for the eurozone, because it is a condition of the programme that to be eligible a country must be in a bail-out programme, subject to tight external budgetary constraints and oversight.
It cannot even buy Greek bonds, and probably not Irish or Portuguese bonds either, because they are currently unable to issue bonds to the markets a further condition for the use of OMTs.
Meanwhile, the domestic political limits to austerity are becoming evident. The electorates of countries in the grip of austerity are close to breaking point. Although dramatic developments this week remain possible, it would be wrong to expect them: more fudge and mudge is more likely. Doubtless the saga has many more acts to run. But those who think that the euro crisis is all over are in for a rude awakening.
Roger Bootle is managing director of Capital Economics. Contact him at firstname.lastname@example.org