Has the Euro Crisis Really Ended?

Several eminent economic commentators are extremely concerned that Europe’s economic crisis is not at an end but that the economies of southern Europe are near to a state of near collapse. Debt ratios all through the southern European states are rising fast and the pace is increasing. Popular and political consent for austerity are breaking down or has already broken down in every southern European Economic Monetary Union (EMU) state that has been hit by the crisis.

Greek riot

Manning the barricades in Greece


Fear of upsetting the electorate of Germany before the September elections has prevented discussion of the looming Euro crisis for months. However, thanks to a leaked report from the European Commission (EC) we now know that Greece is fully expected to fall very short of meeting its austerity target – again. The leaked report is quoted as concluding that Greece has neither the “willingness” nor the “capacity” to collect an additional tax.

Whether or not Greece is willing or able to collect more tax, it seems clear that the tax is not there to collect! The Gross Domestic Product (GDP) is expected to reduce by between 5% and 7% and austerity is taking the blame. There simply is no stabilisation in Greece just a nose-diving economy.


Italy is also still far from being clear of the crisis. With a debt of over €2 Trillion and rising, the country is in dire straits. If Italy had a stand-alone currency, it would now be far enough down the slippery slope to be in an irrecoverable position.

The bond buyers and rating agencies are circling Italy like vultures. Standard & Poor’s have now downgraded Italy’s credit rating to almost junk status (rating BBB) and came close to saying that the end is near. Italy would probably have to run with a GDP surplus of 5%+ for some years to get out of trouble, hardly likely with a growth forecast already slashed by the International Monetary Fund (IMF) to -1.8% for this year. If this forecast turns out to be correct, the GDP will have fallen by 10% over the last six years – a depression if ever there was one.

Finding an escape route is going to be a challenge. As a member of the European Monetary Union (EMU) Italy can’t devalue its currency which is estimated to be over-valued by around 25%.


Moving on, we find Spain in a bit of a bind. The government looks set to be paralysed by allegations of major corruption including the operation of a huge slush fund. At least, this may divert attention away from the massive unemployment levels, particularly in youth unemployment, Spain is edging towards its crisis and the newspaper El Mundo is reporting that a “pre-revolutionary” mood is becoming evident.


Poor old Portugal is also in the frame. The country is in a downward spiral of increasing debt and falling GDP. With growth running at -3% per annum the tax base is reducing rapidly with a knock on effect of this being a failure to meet austerity and deficit targets.

There is talk of Portugal having an “internal devaluation” within the EMU. Even if this can be pulled off, it won’t be a solution to their crisis. It would result in shrinking of the economy without reducing the debt burden. Public Debt is rising and has gone from 93% to 123% since 2010.

Rumours are growing that a snap election may be called leaving the door wide open for an anti-austerity Left-leaning new government. The rumour mill also reckons that the European Union (EU) is secretly working on another bail-out package. This is tantamount to an admission that the previous €78bn bail-out has not worked. This, like the rescue of Cyprus, would require a vote in the German Bundestag with the probable outcome of very onerous conditions being placed upon the shoulders of Portugal.

The citizens of Portugal already seem to see Brussels as a “stooge” of Germany. A best-selling book, by Prof, J. F. Ferreira do Amaral, entitled Why We Should Leave the Euro is becoming a long-standing best seller.

European Leadership

While Rome burns, so to speak, Europe’s leaders fiddle. They are bound by a “solemn pledge” not to force an EMU member into default as they nearly did with Greece with debt haircuts. So what will they do?

They could break their pledge with the attendant shattering of confidence. Alternatively, they could come clean and admit that tax payer funded grants, instead of loans, may be required to rescue some countries and that existing crisis loans may need to be written off.

The environment is not favourable either. The US Federal Reserve tapering of asset purchases is likely to push up borrowing costs.

The EU and European Central Bank (ECB) are particularly prone to doing nothing. That just won’t cut it this time. They need to but probably won’t intervene to avert disasters in several south European states next year. Most of the states involved need an interest rate cut urgently. However, EMU interest rates are likely to remain set at levels which the Germans think is suitable for them – even in the face of the German economy having slowed along with the economies of many of their main export markets.

So why aren’t the markets reacting more profoundly to what is happening in Europe? They seem beguiled by the Draghi promise to stand by Italy and Portugal. The truth is though that he won’t be able to act without a vote first taking place in the Bundestag.