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Friday Five: how the euro crisis could be re-ignited
More muddling through in 2013? Maybe, but don't ignore these clear threats to European stability this year.
by Chris Marshall on Jan 04, 2013 at 13:14Follow @cmarshallCW
Thank you Mario Draghi. Without the president of the European Central Bank – and the FT’s person of the year 2012 no less – we may not have managed the shift from full-blown crisis to ‘muddling through’ that took place in the eurozone last year.
Draghi’s promise to ‘do whatever it takes’ – as well as some stubborn progress towards reform by the leaders of some of the eurozone’s weaker members – could ensure more of the same this year: stumbling closer to integration, cutting debts, but at the expense of stagnant economic growth.
Crystal balls are for lunatics and economists, but there are some clear threats to this widely-held relatively upbeat base case scenario.
1. Political wobble
Italian and German elections represent the most obvious threat to stability in the eurozone this year, and subsequently to a wobbly stock market that is also having to contend with ongoing budgetary uncertainty in the US and questions over Japan’s political future.
The eurozone's paymaster is Germany where polls are scheduled for later 2013, with the euro crisis – and particularly the cost of bailing out Greece – expected to take top billing. Current leader Angela Merkel’s center-right Christian Democratic Union (CDU) is expected to remain in power somehow.
The election will no doubt test market nerves – as to a lesser extent will state elections in Lower Saxony later this month. Economists expect a politicking Merkel will refrain from rushing into any quick decisions on bringing eurozone members financially closer together.
Italian elections are due to be held by April at the latest, although probably as soon as next month. With uncertainty whether incumbent Mario Monti will remain in a position of power, onlookers will be concerned that the country can continue on its path to reform, especially if anti-euro sentiment is stoked by politicians.
Here lies a contagion threat. Renewed market pressure on Italy, pushing up government borrowing costs, could prompt more of the same in Spain. This would in turn renew questions on whether Spain overcomes its reluctance and seeks a bailout…
2. Austerity fatigue
Spain is after all still on the precipicio. Budget targets may be missed even as prime minister Mariano Rajoy turns the screws on the economy. The slight drop in unemployment in December that hit the headlines this week was thought to be a one-off, with economists expecting the unemployment rate to remain above a staggering 25% this year.
A fundamental problem remains. Despite all the efforts of the ECB and politicians to provide a backstop, the reforms must continue. And these will come at the expense of economic growth and jobs.
The result could be more social unrest in Spain, and other eurozone members, adding pressure on politicians to not sacrifice their populace’s economic health in the name of harsh eurozone-enforced austerity.
3. Slow path to (dis)integration
Disintegration of the euro, particularly a 'Grexit', or Greek exit, may look less likely than it did 12 months ago. But that of course does not mean integration is an assured success.
Further integration could in fact dominate newspaper headlines on the eurozone in 2013, with markets still slavishly following every twist and turn at meetings between EU leaders.
Barclays economists expect the discussions to be ‘lively and chaotic’, potentially leading to renewed market tensions.
In particular, European Council president Herman Van Rompuy is due to provide a timetable on closer fiscal policy coordination among eurozone members at a June meeting.
In addition, plans for a single eurozone banking surpervisor, agreed in December, still need to be firmed up in order to be put in place by early 2014.
4. Not by austerity... but by growth?
Their electorates may not like it, but leaders in countries including Portugal, Ireland, Spain, Italy and Greece have shown some progress in reforming their economies. France sits in the naughty corner, however.
To the growing ire of investors – and actor Gerard Depardieu, who prefers the ‘great democracy’ of Russia – newish French president Francois Hollande (pictured) is persevering with his plans for a 75% top income tax rate. It’s the most public step from a man who has vowed to tackle the second largest economy in the single currency bloc’s problems not with austerity, but growth.
As a result, France is now deemed the biggest threat to eurozone stability by many investors.
British prime minister David Cameron, under pressure to repatriate powers from Brussels, will use a speech later this month to reveal whether he will offer a referendum on UK membership of the European Union.
The prospect of a referendum would at once refocus attention on a potentially fracturing Europe – even as eurozone leaders attempt to forge a stronger core. It could even make the EU fall apart, according to a Guardian interview of Van Rompuy.
Recent polls show that a narrow majority of Britons would now vote for the UK to go it alone if they were given the chance.
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