Woe is Europe, or at least the godforsaken bits in the euro zone.
Six years after the financial crisis, you would think the region would be galloping toward recovery since all the ingredients for recovery seem to be in place. The euro zone is running a current account surplus. Interest rates are at their lowest levels in decades, oil prices are falling and – joy for exporters – the common currency is losing value. The European Central Bank (ECB) is flooding the banks with liquidity. All in all, a dream foundation for a compelling bounce-back, or so you would think.
Yet nothing is happening. The euro zone still gives every indication that it faces long-term stagnation or possibly another journey down the economic toilet. The news from the euro zone this week was, yet again, miserable. On Thursday, the flash composite purchasing managers' index for November, compiled by Markit, fell to its lowest level in almost a year and a half.
The next day – Friday – ECB president Mario Draghi did what he always does when the going gets tough, which is to hint that U.S.-style quantitative easing is coming without actually launching it, a cheap way of trying to talk the euro zone into miraculous self-healing. This time, he seemed a bit more serious than usual. The purchases of government debt, he said in a speech in Frankfurt, would boost the appetite for riskier assets and, in turn, "free up capital resources for additional lending."
But we've heard variations of this line too many times before. Mr. Draghi is in danger of becoming the central banker who cried wolf.
Even if quantitative easing comes, there is a good chance it will be too little too late. While the euro zone's immediate existential crisis is over – Greece was bribed with a flood of cheap loans to stay put – and the region as a whole is out of recession, if only barely, the big economies are proving remarkably resilient to growth. France and Germany are flat-lining and Italy is back in recession for the third time since 2008. Families and voters everywhere are getting fed up with never-ending high employment, austerity and wealth destruction. In Italy, youth unemployment is at a record-high 44 per cent and almost two-thirds of 18- to 29-year-olds live with their long-suffering parents. Italy is waiting for the day when the parents go on strike and take to the streets.
This is not why Europeans signed up for the euro. The eventual breakup of the euro zone is not out of the question even though Mr. Draghi insists the common currency is "irreversible." Dream on. Every currency union invented since the Roman era has unravelled. The longer the economic stagnation lasts, the more Europeans will develop romantic feelings for their old currencies, which could be devalued. The perception in Italy and other weaklings is that the euro has benefited one country – Germany – at the expense of all the others.
Two or three years ago, the biggest threat to the euro zone came from the sovereign bond market. When the yields of the bonds of Greece, Ireland and Portugal breached 7 per cent, each of the three countries sued for bailouts and, suddenly, the whole euro zone was on the verge of blowing up. Greece came close to bolting in mid-2012, when the pro-austerity, pro-euro party of Prime Minister Antonis Samaras was on the verge of losing the election to the anti-austerity Syriza party (Syriza lost, narrowly).
Today, bond yields have returned to their precrisis levels, thanks to market-soothing guarantees and promises made by the ECB. Instead, the new threat is political. Almost every euro zone country has a euro-skeptic party, many of which are coming on strong. Some are seriously challenging the mainstream parties and one or two are capable of forming ruling coalitions.
In Greece, Syriza is topping the polls and, on the good chance a snap election is called, could find itself running the show early next year. In Italy, Beppe Grillo's anti-euro Five Star Movement is the second-biggest party in parliament and continues to poll at 20 per cent. In France, the rabidly anti-euro and anti-immigrant Front National, led by Marine Le Pen, won May's European Union elections and recent polls say she would triumph in the presidential elections. Even Germany is flirting with a populist, anti-euro party. It is called Alternative for Germany and picked up almost 10 per cent of the vote in the EU election.
What will save the euro? A fast drop in the jobless rate might do the trick, but that scenario is highly unlikely as long as austerity stays put – Germany still considers austerity sacrosanct – and governments lack the resources to spend on infrastructure and other job creation schemes.
The pressure is on Mario Draghi more than ever. If stagnation continues to grip the euro zone, the euro-skeptic parties will only get more popular, to the point that one country will hold a referendum on pulling the plug. Endless hints about using more stimulus to pull the euro zone out of its slump is turning into a joke. It's time to press the quantitative easing button.
Eric Reguly