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Fate of Eurozone: Back on the Brink?

May 24, 2012 at 12:00 AM EST
Economic divisions between France and Germany were reinforced Wednesday at a summit on Europe's debt crisis with austerity, promises of economic growth and a potential euro exit by Greece among the topics of open and vocal debate. Jeffrey Brown and The Economist's Zanny Minton discuss what's ahead for the eurozone.
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JEFFREY BROWN: And here with me is Zanny Minton Beddoes, the economics editor for The Economist magazine.

Zanny, rather suddenly, there seems to be a lot of anxiety, even fear. Am I right?

ZANNY MINTON BEDDOES, The Economist: You’re absolutely right.

Unfortunately, the sense of crisis is back and I would even say that the sense this whole euro project could fracture is back.

JEFFREY BROWN: That serious?

ZANNY MINTON BEDDOES: Yes, I think it’s that serious.

If you remember, at the end of last year, the end of 2011, we had a similar moment of real fear in global financial markets. And then the European Central Bank came in and basically poured a trillion euros worth of liquidity into European banks.

And that calmed things in the beginning of this year for a couple of months. It led the Europeans to think — to crow, in fact, that they have solved their crisis. But with hindsight, it turns out that that was, I don’t know, an anesthetic, if you will, but that the underlying disease is still there and it’s come back with a vengeance.

JEFFREY BROWN: But it came back almost through a political route, right? We had all these elections. And now it looks like political disarray, as much as economic problems.

ZANNY MINTON BEDDOES: Absolute — political and economic.

I think there are three reasons why this real sense of crisis has come back. The first is it’s political, and it’s Greece. The Greek voters basically in their elections at the beginning of this month voted overwhelmingly for parties that wanted to renegotiate or rip up or not continue with the austerity package that they had agreed with the Europeans.

And they couldn’t form a government. They’re now having another election on June 17 and that’s basically turned into what is going to be a referendum in effect on whether they want to stay in the euro or not. And so suddenly, from that, there’s a fear that actually one of the 17 countries may leave or may be pushed out, really concerning many — then considering others — is that the beginning of, Greece goes, which goes then, Portugal or Spain?

So that’s reason number one. Reason number two is that on the economic side, the recipe doesn’t seem to be working. If you look at the Spanish economy, you have got huge unemployment, 50 percent youth unemployment, you have got a huge deficit, and the debt problems are getting worse.

And I think there’s a growing concern that the current recipe isn’t working and the disarray about what to do.

JEFFREY BROWN: All right, well, let me stop you on reason number two because it sounds like the two sides have formed, right, Germany, which we have heard for a long time. And now you have a representative from France now with the new president saying, wait a minute, there’s another route.

Now, we just heard in the tape piece a suggestion of maybe of a middle or balanced approach, I think, the German foreign minister. Is there any — are the two sides hardened here? Or is there a sense that there’s some way else?

ZANNY MINTON BEDDOES: I think it depends what time frame you’re talking about.

I think in the short term, there is some room for the two sides to come together. To caricature just a bit, the Germans think that austerity, budget-cutting is absolutely the essential thing. And the other side thinks that growth is really important.

And I think Germans are willing to say we will have some measures to boost growth alongside our austerity. And so I think what you will see is some short-term measures, some increase in the capital of the European Investment Bank, a fewest modest tinkerings to say we are going to have growth and austerity.

But there’s an area where still a very big difference, which is the whole area of euro bonds and the whole area of to what extent do you need to take a big step now to create some kind of mutual fiscal. . .

JEFFREY BROWN: Which was on the table a while ago, at least raised, set aside, in the last year or so, but now you’re saying is back potentially.

ZANNY MINTON BEDDOES: I think it’s back because I think a lot of people have realized that in the medium term, the euro’s future depends on having some greater movement toward some more fiscal union.

They need, if you will, a kind of Hamilton moment. They need to have someone mutual debt issued, firstly to give markets confident that they’re really determined to stick with this project, secondly to allow indebted governments, the Italys of this world, some means of access to cheaper money, and thirdly to provide European banks with a safe asset, which is a euro-wide asset.

JEFFREY BROWN: Right. Now, I think I stopped you at reason number three.

Do you remember, reason number one was Greece and. . .

JEFFREY BROWN: Reason two was the economy and the Band-Aid.

ZANNY MINTON BEDDOES: Reason number three is politics and I think the growing sense that European voters are fed up and that European voters are voting for more extreme parties, they’re voting against the establishment.

And this isn’t just happening in Greece. This is happening across Europe. Even Angela Merkel for slightly different reasons lost in two important state elections in the past few weeks. So I think there’s a sense that in a region whose economies are shrinking, where the economic outlook is looking darker, voters’ patience with this current route is running out.

JEFFREY BROWN: And all of this means this thing that we sort of talked about and everybody said could never happen, a member leaving the euro, might — I see people spinning out how it might happen and when it might happen.

ZANNY MINTON BEDDOES: Absolutely. And some point, the risk is that those kinds of things become self-fulfilling. If enough people can say it will happen, it will happen.

JEFFREY BROWN: And then the question, as you raised before, what impact, right, any domino effect that might happen, which is unknown.

ZANNY MINTON BEDDOES: Which is unknown.

And I think to hold the rest of the currency together, if Greece does leave, the others, the 16 that remain, will have to take a quantum leap towards greater integration, and they will have to do it much faster than the Germans now seem prepared to want to do.

JEFFREY BROWN: All right, Zanny Minton Beddoes of The Economist, thanks so much.

ZANNY MINTON BEDDOES: Thank you.