Eurozone Still Skates on Thin Ice

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BOLOGNA — Students at SAIS Europe paying tuition in U.S. Dollars became unofficial but willing recipients of what I have taken to calling the “ECB Fellowship” and the “Syriza Scholarship” in the wake of the turmoil affecting the Eurozone. As the U.S. appears to be tentatively tiptoeing away from its economic woes in the hope that they won’t wake up again and ending quantitative easing, the European Central Bank decided to pursue the opposite course of action, announcing a massive €1.1 trillion program of quantitative easing in January aimed at buoying the currency back to life amid fears of deflation. Both that announcement and the recent election of the left wing anti-austerity party Syriza in Greece caused the euro to depreciate against the dollar to levels not seen in years.

One can draw a sharp contrast between the dollar and the euro in many ways. While the U.S. has been both a fiscal and monetary union for longer than any person alive today can remember, the ongoing experiment of the Economic and Monetary Union of the European Union (EMU) has achieved the latter in what is now 19 sovereign states, but has not yet achieved any sort of meaningful fiscal union to accompany the shared currency. In many ways, the economy of Europe — and Italy where SAIS Europe is located — can be understood by looking at the euro and the many challenges it faces in the economic, political, social, and legal spheres.

Under the terms of the 1992 Maastricht Treaty, EU members are supposed to limit deficit spending and debt levels in anticipation of joining a common currency and to continue doing so once they have joined the euro. While those criteria theoretically should have prevented the conditions that led to the 2009 European sovereign debt crisis and its aftermath that continues today, there is ample evidence that the criteria truly only lived on the paper they were written on. German Chancellor Angela Merkel stated in August that Greece should never have been allowed to join the common currency due to not meeting the requirements, but the Eurozone giants of Germany, France, and Italy have also all broken the rules set forth in the Maastricht Treaty.

When the ability of Greece, Ireland, and Portugal to finance their debts was called into question in 2009 the Eurozone was not only completely blindsided, but it was also unprepared for a crisis of those proportions particularly as the much larger economies of Spain and Italy appeared to be sprinting toward the same fiscal cliff the first three had already jumped enthusiastically off of. In the years since then, German-styled austerity measures have swept Europe to the consternation of the political left and institutions were developed to address the immediate crises facing the Eurozone members in economic freefall.

Though the Eurozone still lacks any kind of fiscal union, the domestic political demands of financially solvent members like Germany and Finland called upon to provide aid stipulated serious reforms that recipients must comply with or risk being cut off like irresponsible children. Larger members with fiscal problems of their own — seeing a possible end result without some sort of change in course — have also begun reforming their economies to hopefully return to growth.

In spite of the success of German-sponsored reforms in bringing national budgets into balance and allaying fears of fiscal insolvency, the Eurozone is not out of the woods yet and may very well have its next crisis teed up. Ireland has turned its situation around to now stand as the Eurozone’s fastest-growing economy. While the ruling Partito Democratico in Italy is hopeful that its reforms will turn around an economic malaise that has gripped Italy almost since the country’s entry into the Eurozone in 1999, the reality is that Italy remains dangerously near the bottom of the barrel in Europe with regard to its unemployment rate (particularly youth unemployment), tax structure, labor regulations, and corruption. It has a long way to go to become competitive, but appears to be making steps in that direction if reforms can be pushed through its bureaucratic and convoluted political process. On the other hand, the election of Syriza in Greece on an anti-austerity platform demanding the write-off of a significant portion of the country’s sovereign debt in addition to a return to the high public spending of before the crisis threatens to continue causing instability across the continent as attempts are made to roll back reforms.

The likelihood of the Eurozone’s complete disintegration has fallen significantly since 2009, but Greek intransigence in negotiations to receive the aid it needs to survive and German stubbornness in refusing to compromise on its conditions for putting its taxpayers on the line for Greek policies spells out a recipe for a conflict that at this time looks to only have a limited set of options for resolution: The Eurozone could evolve to increasingly take on aspects of a fiscal union, allowing tighter control of national budgets by a central European authority, Greece and Germany could come to an agreement that puts the former back on the path to meaningful reforms while the latter provides additional economic aid, or Greece could be expelled from the Eurozone and forced into a death spiral of debts denominated in euros while the newly-reintroduced drachma plummets in value. Since the first option is equally unpalatable to Greek and German voters and the last would likely spell the beginning of a new era of political and economic instability, let us all hope that they find a way to make the second work.

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