The Euro Is Facing a Make-or-Break Year

For good or bad, the future of the euro will probably be decided this year. In an attempt to generate inflation, central banks have cut short-term interest rates to nothing or less over the past 20 years or so and expanded their balance sheets to levels that would have been previously unimaginable. The European Central Bank has been particularly aggressive. Euro deposit rates are minus 0.5% and the ECB’s balance sheet is laden with 8.5 trillion euros ($9.66 trillion) of assets, four times more than at the beginning of 2015.

Where the ECB has differed from other central banks is in its other, generally unstated, aim: to keep the euro project on track by preventing yields on sovereign bonds issued by its weaker members from rising abruptly. As it turns out, this makes the euro much less stable.