The euro area is growing again. The banking system has survived its stress tests. The Greeks have implemented their first austerity measures with some success.
The fevered predictions of the early summer that the euro was doomed, and that Europe’s sovereign-debt crisis would rip through countries such as Spain and Portugal like a virus, have been forgotten. The crisis appears to be over.
Don’t believe it. Under the surface, the cracks in the euro are getting worse. The imbalances in the euro area are growing all the time. The resistance to the bailout package will rise as the terms turn out to be immoral and absurd. And the big-deficit nations are locked in a downward economic spiral.
The euro has bought itself some time, at a huge cost. And yet little has been done to fix the causes of the crisis.
True, there have been signs in the last month that the situation has stabilized. Last week, the European Union said the 16 economies sharing the euro grew 1 percent in the second quarter, the strongest rate of expansion in four years.
Most of Europe’s banks passed the “stress tests,” designed to judge their ability to withstand financial-market shocks, easily enough. They have bounced back from the crisis and look in decent shape again.
The euro has also strengthened to $1.28 after reaching $1.19 in June. Even Greek stocks are looking healthier: The ASE Index of leading shares quoted in Athens has bounced back to more than 1,600 from less than 1,400 during the crisis.
At this rate, even the editors of Germany’s mass-market Bild newspaper will soon be congratulating their Greek friends on their sober and responsible approach to economic management.
Think again. Here’s why we should be skeptical.
First, the euro area remains as dangerously imbalanced as always. Take a look at those growth figures. In the second quarter, German gross domestic product grew 2.2 percent. Other countries didn’t do nearly so well. Greece’s economy shrank 1.5 percent, while Spain registered just 0.2 percent growth.
The debt crisis has even helped Germany by weakening the euro, thereby strengthening its exports. It has hardly helped nations like Greece because they don’t export much. Instead, the euro area is more lopsided. Germans are getting wealthier, yet they are being forced to subsidize Greeks who are getting poorer. That won’t be sustainable for long.
Second, opposition to the bailouts may grow.
Slovakia has understandably refused to ratify its share of the rescue package. Any political system needs to be both fair and reasonable to command support. The terms of the bailout are neither. You can’t tell relatively poor, hard-working people who have played by the rules, like the Slovaks, that they have to help out countries that didn’t, such as Greece. You might get away with it once or twice, but if the euro area is simply a mechanism for transferring wealth from the industrious to the feckless, it is hard to see it surviving. The responsible nations are going to want out at some point.
Slovakia will no doubt be ignored. The EU doesn’t pay much attention to protests from its smaller members, particularly from Eastern Europe. But Portugal and Ireland, which will also have to help Greece, may join the protest soon. Even if they don’t, the billions in aid and loan guarantees promised for Greece and the other deficit countries can’t be taken for granted. The new government in Slovakia was elected on a platform of opposing the bailout. “Say no to the Greeks” is a great campaign theme and will surely be copied in the region.
Third, the Greek economy is in a terrible state. It may have delivered on the first round of the austerity package demanded as part of the rescue. That was always going to happen. But the economy is still shrinking. With the government cutting spending and with strikes hitting the tourist industry, it is impossible to see it recovering any time soon.
As the Greek economy shrinks, the tax base will fall, and the task of curbing the deficit will get harder. Greece has always needed a growth strategy as well as a deficit-reduction one. There has been no sign of that so far.
Europe’s sovereign-debt crisis was always going to be a drawn-out affair. Lulls in the storm are to be expected. Crisis finished? It’s only just getting started.
(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a forthcoming book on the Greek debt crisis. The opinions expressed are his own.)
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