Nosemonkey's EUtopia

In search of a European identity

Eurozone in trouble?

10 euro noteHell, it seems to have weathered the storm better than most economies so far – but as long-time readers of this blog will know, I’m the last person to try in-depth economic analysis. Know your limitations, I always say, which is why I rarely cover the Eurozone in any depth.

Thanks, then, are due to Claus Vistesen at Alphasources for this handy breakdown of the current Eurozone economic indicators:

In Italy, business confidence slumped to the lowest level in seven years; in France, it clocked in at the lowest since 2005 and in Germany the ever so important (for ECB policy that is) IFO survey declined to a three year low… Adding to the gloom we also got the PMI release today showing its lowest reading since 2001.

Furthermore, in Spain where it isn’t the proverbial Rome but moreso Madrid (or perhaps the Cedulas?) that are burning, an already groggy economy got some additional blows in the kidneys (see also below) as we learned how secondary inflation rose to an all time highs at one and the same time as the economy shed jobs in Q2 to move into double digit territory with respect to the unemployment rate. As for real economic data consumer spending in France added a near final nail to the coffin by dropping 0.4%.

…There can be little doubt that the data releases above are suggestive of the fact that the Eurozone may well be heading for a full blown recession in Q2 and Q3

Yay! Everyone loves a good recession! It’s now a race to the finish line – who’s going to make it first, the UK or Eurozone? (Far more exciting than the Olympics, this…)

While Claus provides additional analysis (well worth a look) and links to various reports (of which this is a chart-packed highlight), the real question is longer-term. If the Eurozone enters its first recession at the same time that the EU is doing the headless chicken act over the Irish Lisbon Treaty referendum result, what will be the impact on the long-term viability of the EU as a whole? With the economy looking shaky, will the countries of Europe look to the European Central Bank in Frankfurt or to their own national banks for stabilising measures? And can the ECB – only in existence for a decade, lest we forget – handle the tough times as well as the easy? Well, some analysts think the signs point to a big fat no:

While it is certainly overdone to shift all the blame for this sharp downturn on this side of the Atlantic on the ECB, one has to note that the sharp (and in a global context idiosyncratic) turn to the worse coincided with Jean-Claude Trichet’s announcement at the beginning of June that it would increase interest rates… it might just be that the latest interest rate hike and the rhetorics which came with it were the proverbial straw which broke the euro-area’s economy’s back. For ECB critics, it certainly now is easy to make this case. Prepare for some more ECB bashing by the public going forward, especially if the US economy in the end weathers the crisis better than the euro-area.

So, it’s not just the constitutional/Lisbon Treaty crisis – the very centrepiece of European integration is also beginning to look shaky. If the Eurozone starts to crack under the pressure, and especially if those member states outside the zone of monetary union do better than those with the euro, what then for the EU? The little I do know about economics tells me that confidence is of supreme importance – if confidence in the euro is lost so early in its life, will it be able to survive?


  1. The Euro will survive so long as there is the political will to hold it together. It was never an optimal currency area (though neither is the UK), and the one size fits all interest rate was always going to cause problems. However so long as the political desire for greater integration is sufficient that they are willing to deal with the pain that the problems the Euro causes is greater than the desire to get rid of these pains it will continue.

  2. The chance of Sweden adopting the Euro will probably linger on the outcome of Sweden versus the Eurozone in this recession. The parties agreed to not have a referendum/debate about adopting the Euro until post-2010. *Anything* that makes it seem like Sweden survived better than the Eurozone will be a huge hamper in an already skeptical population (I think latest numbers show only 30% would vote yes). It will increase the already long uphill climb for pro-integrationists.

  3. Personally, I give the Eurozone’s single minded monetary policy 2 to 3 years at best. The breaking of rules, allowing countries in that did not have their economic houses in order, is what will likely break the Eurozone ‘Union’ itself. Even within the G-7 Euro-zone nations of France, Germany, and Italy, the differences are stiking. Germany may not want to put up with being the crutch of Europe forever, and Italy seems to be determined to be the leech for as long as Germany allows it to. The socialist economic policy will also have to be altered to be more in tune with that of the U.S, or even the U.K., as the differences are becoming more and more apparent and will only grower wider. Google “Back Talk Engram” and read some of this professors articles under his Euro verses U.S. section. It may surprise you.

  4. Well, at the time, the consensus was that this story would run and run and this morning we had a piece in the Guardian (not known for pursuing a virulently anti-EU crusade) under the headline banner: “Contagion could fracture the eurozone – Assertions of the credit crunch’s Anglo-Saxon nature look foolish now”

    I agree with the basic intellectual arguments advanced in this article. A Monetary Union is not the same thing as a Political Union and the former is not sustainable in the longer term (how long is longer term in such context is an intriguing question in itself?) without the latter.

    I have argued consistently (for more years than I care to recall) that the momentum supporting the evolution of (closer?) European integration (manifested as it is in the form we call “The European Union) or what was termed “Ever Closer Union” in the founding treaties – cannot be maintained. Just like a plane the EU requires similar political momentum to maintain its flight, otherwise it will stall and enter a tail-spin from which it will never recover; certainly not in the form it now resembles?

    In this context the EU’s increasingly complex hybrid constitutional arrangements begin to look ever more farcical. The Europe of Nations (Europe des Patries of De Gaulle’s era) geo-political model is simply no longer fit for purpose and that fact has been ruthlessly exposed just this morning by the German govt’s shamelessly self-defence motivated decision to guarantee 100% of all deposits in German banks. A market with no barriers cannot survive if one (vitally important) partner within said market unilaterally decides to change the rules.

    In this respect the terminology used in the article is vital because it reflects the unspoken, yet undeniable logic underpinning the entire progress of the European integration process. This particular passage is seminal “In the long term, monetary unions do not survive without political union, and so the fifth conclusion is that there are pressures both for closer integration and for disintegration. The crisis could strengthen those who argue that the halfway house is inherently unstable and will remain so until there is fiscal as well as monetary union. On the other hand, the growing threat of recession may make some countries question the value of remaining in a monetary union.”

    So Europeans (and by that I mean ordinary citizens rather than political élites) need to ask themselves a serious question in the coming weeks and months. What kind of Europe(ean integration) do we want (if indeed we want it at all) in the (21st century) future?

    If the Europe of Nations template is broken what kind of alternative blueprint will serve us better in the future?

    These are massive questions and they should not (indeed, cannot) be ducked.

    Postscript: Seems as though Angela Merkel is backtracking on previously reported comments; the pledge to underwrite 100% of deposits is a “political” rather than a legally bound gesture.

    Either way this apparent retraction merely underscores the potential for fracture of a supposedly “Single Market” if that entity is not bound by clearly defined rules – such as those that might be contained in a European Constitution?

  5. Pingback: The credit crunch and the EU | Nosemonkey’s EUtopia