Friday 20 April 2018

Euro stuck in danger zone without an escape plan

Timid leadership and restrictive policy means we are unlikely to have a sustainable recovery, writes Colm McCarthy

Colm McCarthy

Colm McCarthy

Rosy assessments of economic prospects in Europe keep running up against a few inconvenient truths: the economies in most countries are showing no signs of recovery, the banking system is still broken and there is no political willingness to fix it. The overall stance of macroeconomic policy at eurozone level remains restrictive, despite the evidence of widespread stagnation. The policy stance is to issue upbeat forecasts while doing nothing to make them a reality.

The eurozone is entering the sixth year of the banking crisis with no evidence that the critical lessons have been learnt or that serious safeguards against a repetition have been put in place. There is no sign of political commitment to a proper banking union and the financial system still looks fragile. This overshadows prospects for sustainable recovery in Europe generally and particularly in Ireland, one of the principal casualties of the eurozone debacle.

Countries without their own currency or central bank can face persistent liquidity crises, with both governments and banks struggling to finance themselves, and these crises can last for very long periods. A poorly designed common currency area which lacks the architecture of a full monetary union is particularly vulnerable to these liquidity crises. To a greater or lesser degree, they have brought down Cyprus, Greece, Ireland and Portugal, all four requiring official lender support, with Italy, Slovenia and Spain also encountering severe financial pressures. Seven of the eurozone's 17 members are in serious trouble. Where the fate of governments and banking systems are intertwined, banking problems can infect government credit-worthiness as happened in Ireland, while the insolvency of the government, as in Greece, can bring down the banks. It is quite remarkable that the IMF, a lender of last resort for 187 governments, now sees most of its worldwide balance sheet deployed in the eurozone, in the form of emergency loans to countries which are members of a rich country club.

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