Euro Zone Woes, Elephant Still in the Room

by Andrew Stuttaford

The Economist frets over the prospects for euro zone growth:

In recent weeks the countries of the euro zone have begun to take in water once again. Their collective GDP stagnated in the second quarter: Italy fell back into outright recession, French GDP was flat and even mighty Germany saw an unexpectedly large fall in output…Meanwhile, inflation has fallen perilously low, to around 0.4%, far below the near-2% target of the European Central Bank, raising fears that the zone as a whole could fall prey to entrenched deflation. German bond yields are hovering below 1%, another harbinger of falling prices…

What started more than four years ago as a banking and sovereign-debt crisis has decayed into a growth crisis that is now enveloping the three biggest economies. Germany is teetering on the edge of recession. France is mired in stagnation. Italy’s GDP is barely above its level when the single currency came in 15 years ago. Since these three countries account for two-thirds of euro-zone GDP, growth in places like Spain and the Netherlands cannot make up for their torpor.

The underlying causes of Europe’s new ills are three very familiar and interrelated problems. First, there is a shortage of political leaders with the courage and conviction to push through structural reforms to improve competitiveness and, eventually, reignite growth: the big countries have wasted the two years bought by Mr Draghi’s “whatever it takes” commitment. Second, public opinion is not convinced of the urgent need for deep and radical changes. And third, despite Mr Draghi’s efforts, the monetary and fiscal framework is too tight, throttling growth—which makes structural reforms harder.

The first two elements on that list are a reminder that there is still a limit to which the democratic process can be bypassed. The currency union may in theory demand structural reforms of the type that The Economist would like (not altogether unreasonably) to see, but the democratic buy-in for those reforms does not exist. That the single currency was designed to be the agent of deep structural reform within some of the less competitive countries of the euro zone may have been understood by at least some members of their political class, but this information was not passed on (in any meaningful sense) to the voters. If anything, the reverse was true; a number of governments used the cheap money that accompanied the introduction of the euro to take a holiday from reality and, in some cases go on a binge.  Reality eventually bit back, but the underlying political reality had not changed. Culture—and political culture—runs deeper than that: after more than 150 years of, so to speak, Italian monetary union, Naples is still not Milan.

In this connection, a new poll for Spain’s El Mundo is worth a comment.

Open Europe explains:

According to a new Sigma Dos poll for El Mundo, the anti-establishment (but not anti-EU) party Podemos would finish third in a general election with 21.2% of votes – only 1.1% less than the opposition Socialist Party. Being neck-and-neck with one of Spain’s two traditional parties is an absolutely extraordinary result for Podemos, given that it was founded in March. The poll puts Spanish Prime Minister Mariano Rajoy’s centre-right Partido Popular in the lead on 30.1% – a 14.5% fall from the 44.6% the party scored at the November 2011 general election.

For some background on Podemos, go here.  The party is anti-austerity and of the far left. Amongst its promised delights:  ”Regain public control over strategic sectors of the economy: telecommunications, energy, food, transport, health, pharmaceutical and education.”

Well that’ll work.

The third of The Economist’s points—that the euro zone’s monetary and fiscal policy is too tight—is not wrong, whatever the Germans may say, but there’s a catch.

Writing in the Daily Telegraph, Roger Bootle:

 It is all very well saying, as I do, that the pace of fiscal consolidation should be slowed, but how do you stop France and Italy from backsliding?

Good question.

Germany’s politicians signed their country up for a currency its people didn’t want, but they at least promised there would be no bailouts (um…) and that the European Central Bank would run a tight ship with its passengers, so to speak, keeping their finances in order. For the ECB to ease discipline across the euro zone might make sense economically, but it would a very ugly reminder to German voters of what their politicians signed them up to in the first place.

And while on that topic, Germany’s new right of center AfD  has just won 9.7% of the vote in regional elections in Saxony. As a result it will enter a regional parliament for the first time.  The AfD is not anti-EU, but it does want Germany out of the euro, and in the interim it would be highly unlikely to welcome any concessions by Germany on euro zone financial discipline.

Deutsche Welle:

Saxony’s state premier, Stanislaw Tillich, put to rest speculation that the CDU might opt to form a coalition with the euroskeptic Alternative for Germany (AfD), which won representation in a state parliament for the first time with 9.7 percent of the vote. The AfD has attracted many voters dissatisfied with [Merkel’s] CDU’s shift to the left in recent years.

“We will search for a coalition partner with whom we can achieve something for the state,” Tillich told German public broadcaster ARD. “That’s certainly not the AfD.”

In a press conference on Monday, Chancellor Angela Merkel said that the AfD’s success at the polls was largely thanks to protest votes.

“We can stop this protest, if we – as the Union, as the CDU – speak to and solve the issues that mobilize the people on the ground,” the chancellor said.

She’s a joker, that Mrs. Merkel.

One size: still not fitting all. And that is still the elephant in the room.