No Quiet on the Western Front
The eurozone lived to fight another day. But a new battle is brewing.
Is there light at the end of the Chunnel? Five years after the global financial crisis kicked off, the eurozone is finally starting to regain its economic footing. Budgets are being balanced, growth is returning, and questions about countries leaving the currency union have ebbed. Yet despite a positive outlook for the short term, the eurozone still hasn’t resolved the issues that cloud its future as an economic bloc.
The eurozone arguably turned the corner in July 2012, when Mario Draghi, the president of the European Central Bank, pledged "to do whatever it takes to preserve the euro." Not only would the bank keep short-term interest rates low, but it would also bolster the finances of member countries by buying their bonds and thus reducing the interest they paid on their debts.
The markets took Draghi at his word, and confidence in the euro and the eurozone began to strengthen. Meanwhile, Spain cleaned up its banks and launched a reform of its public sector; Portugal survived the worst of its austerity program; and Ireland became the poster child for fiscal and financial turnaround. Even Italy showed signs of exiting its two-year recession, provided it could achieve a measure of political stability.
Indeed, for much of 2013, the eurozone seemed well on its way to recovery. Its overall recession ended over the summer, and at the time of this writing, the euro’s trade-weighted value had risen more than 8 percent since Draghi’s speech. Only Greece has continued to limp along, barely satisfying the terms of its existing bailout and possibly heading for another one.
Still, it’s hard to find anyone these days who thinks Greece or any other country will leave the eurozone soon. Draghi’s October visit to the United States was something of a victory lap; at a speech in New York he said, "[The] euro area has a strategy to return to sustainable growth and employment, and that strategy is actually being executed." All policymakers need to do, he said, is to "stay the course."
In the short term, he might be right. Budget deficits, which averaged 6.5 percent of GDP in 2009, are now at 3.7 percent. Public debts have risen substantially, but they are still controllable in non-bailout countries. And the International Monetary Fund expects GDP to grow in every eurozone country except Cyprus and Slovenia next year.
The medium term, however, is a different story. High unemployment in the eurozone and the European Union as a whole has inflicted damage that may take many years to repair. The labor force in a country doesn’t always bounce back when economic growth returns. People who have been jobless for years may be too discouraged to look for work again. The return of growth may be accompanied by demands for higher wages among the employed, narrowing the scope for new hiring. And the skills of the unemployed may have become obsolete during their long spells of joblessness. As Draghi and others have suggested, young people may be at a particular disadvantage in such a difficult labor market. They have little or no experience, and their education may not have given them the skills employers are seeking.
Even if the eurozone survives these dark portents, there is no guarantee that the problems of the past several years won’t recur. This is because the fundamental problem with the euro has not been solved: A single monetary policy is still not appropriate for all the countries that use the currency, and it may never be.
This is mainly because the economic cycles of the members have failed to synchronize. Although the variance in growth rates among eurozone members came down in the previous decade, since the global financial crisis it has returned to pre-euro levels.
Enhanced trade was supposed to aid synchronization, but the eurozone’s members haven’t performed any better than the three other EU countries — Britain, Denmark, and Sweden — that opted not to join the currency union. Since 2001, when there were 12 EU countries in the eurozone, the two groups’ exports within the EU have, on average, grown at about the same rate.
The euro may have aided economic integration in other ways, but by these two primary measures, its effect has been negligible.
If economic cycles in the eurozone fail to synchronize, its downturns and recessions will continue to be unduly deep. The reason is simple: Countries that use the euro can’t unilaterally devalue their currencies in a bid to attract investment and boost exports. As a result, the return to growth and job creation takes longer. Making matters worse, the European Union’s new, stricter fiscal rules — designed in part to protect the euro — will make it harder for countries to stimulate their economies with government spending.
Unfortunately, synchronization is where the long-term outlook for the eurozone is the blackest. In terms of future economic development, its members are diverging. Some boast entrepreneurial environments for business that are ripe with innovation, while others continue to struggle with bureaucracy and corruption. Some have relatively young populations and manageable debts, while others are aging fast and staggering under the burden of existing borrowing and pension liabilities. It does not help that these differences largely follow geographical lines.
Given these fundamentals, the economies of the eurozone countries will not fall magically into lock step merely because they share a single currency. If workers could move easily among them, there might be some hope. People would flee weak economies and flock to strong ones, helping to balance wages and unemployment across the eurozone. But even with nominally free migration within the European Union, barriers including licensing, languages, and prejudice still exist. And with anti-immigrant sentiment having risen in tandem with unemployment in some countries, the potential saving grace of the eurozone is also one of its most controversial attributes.
The recent crises among EU members had diverse causes, from bank failures to low tax collections. Taken as a whole, however, the crises served as a late alarm bell from a system that was broken from the beginning. It’s still a long way from being fixed.