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“The crisis, the economic and social fragmentation, continues to persist due in large part to political disagreements but primarily because the EU seems unable to reform into an efficient body and alliance of mutual benefit, with mechanisms in place that counteract stagnation and enhance stability.
By Harris A. Samaras
After a rather unjustified economic euphoria at the beginning of last year, and after a slowdown in 2018, however moderate, the Eurozone (and the rest of the EU) is likely to enter into stagnation, as France, Italy, Germany and Spain post weaker growth figures than expected. Note that the likely rise in bond yields may also affect credit growth.
For some inexplicable reason and as if there is a lack of common European understanding and response to what matters most, European governments seem to have completely abandoned any fundamental reform agenda, and the rise in public spending – as if the EU is suffering by a chronic delusional disorder, insisting to financing low productivity – combined with lower tax revenues and growth, could very well erode the confidence in the solvency of the Eurozone major economies.
The largest impact is probably going to come from weakening consumption and industrial output. Although weak commodity prices may aid the Eurozone to avoid a recession, credit risks will more than likely exacerbate as the effect of ECB purchases ends and political unrest rises.
With the possibility of a hard Brexit increasing, and with the threat of an escalating global trade war looming, fragile governments in Italy, Spain and Greece could also present legislative challenges or spark snap elections. The valid or not social unrest in France continues… and so does the political fragmentation in all the aforementioned countries.
Let alone the not to be forgotten and ongoing problems stemming from mass immigration whether these are from Africa or the Middle East or by a war on Europe’s eastern frontiers escalated by a defiant Turkey which systematically violates the rights of two EU member states, Cyprus and Greece, with the EU unable or not willing to tangibly intervene – again a lack of common European response…
Moreover, the strain between creditor and debtor nations or that of larger and smaller ones, such as the recent increased taxation plans of France and Germany that would in the short term benefit large EU member states but are bound to put smaller countries at a disadvantage, trigger further divergence and further fragmentation, both political and economic.
So, with Euro area debt still at high levels, affecting country borrowing costs and government bond yields, the law of diminishing returns takes over, and in combination with increased regulation, the markets further asphyxiate. And, without any more tools at its disposal, without the power to devalue and without a system of fiscal equalisation, the Eurozone seems to be in the process of a terminal decline.
Remember that the previous European financial crisis began when investors became concerned about growing levels of sovereign debt. As they began to assign a higher risk premium to the region, sovereign bond yields increased and put a strain on national budgets. The crisis, as well as the economic and social fragmentation, continue to persist due in large part to political disagreements but primarily because the EU seems unable to reform into an efficient body and alliance of mutual benefit, with mechanisms in place that counteract stagnation and enhance stability.
It is never too late! But is the EU leadership willing to accept that something is fundamentally wrong and take bold actions that could admittedly be costly for some of its politicians’ careers? Not an easy task, as own member-states’ geopolitical and economic agendas, but also agendas of private industrial and other lobbies’ may be disrupted.
While no sane economist can doubt that the Eurozone has ever been more vulnerable to market shocks than today, it is only through further political and economic integration that the EU will be able to provide appropriate responses to current and future crises. And, it is the lack of a common European response that is most striking.
Needless to say, the Eurozone recession risk is rising!
Harris A. Samaras is an economist and Chairman & Group CEO of Pytheas, a global investment banking organization. Formerly with the Bank of America Group, Thomson Financial BankWatch and Moody’s Investors Service www.pytheas.net
