The Euro Crisis in 2012: Belief, Will it be Enough?

by Ferdi De Ville

This is my final entry in this blog on the euro crisis in 2012. Many things have happened and been decided and installed the past year, too many to recap them all here. There have been moments at which a collapse of the euro area as we know it, once unthinkable, seemed really close, especially in the weeks before the second Greek elections when the Spanish banking sector was going down also. Apart from the Greek elections, some other ballot outcomes have been hailed as turning points for the euro crisis: the success of the socialist Hollande in the French elections and the victory of pro-European parties over their anti-European challengers in the Dutch elections.

But if I had to select one day of this year to be awarded the label of turning point, it would be the one on which ECB President Mario Draghi gave his ‘believe me, it will be enough’ speech, indicating that the ECB was finally willing to assume its ‘lender of last resort’ role. The ECB at the end of the summer acted on this pledge with the launch of its Outright Monetary Transactions scheme. It meant that the ECB in the end would use its unlimited resources to safeguard the euro. Together with the acceptance of a new rescue package for Greece at the end of the year, it restored the confidence in the irreversibility of the euro. This is what made Draghi the ‘man of the year’ for the Financial Times.

The OMT has not been used yet, its mere announcement has sufficed to dramatically push down the bond yields of Spain and Italy. Markets seem for the moment to belief that if needed, countries (read: Spain) will be willing to accept the conditions (apply to the European Stabilisation Mechanism and thus agree to a reform programme) for OMT. Besides this explicit conditionality for OMT, the implicit agreement of Draghi with the political leaders in the euro zone was that he would buy them time in this way that they would use to further improve their governments’ budgets and economies’ competitiveness, and, not the least, take bold steps in completing EMU.

After the last summit of the year, we must conclude that, regarding completing EMU, the OMT has resulted in exactly the opposite of what was intended. Instead of prodding Heads of State and Government of the euro area to agree on an ambitious give-and-take package deal, it has taken away pressure and has led them to retreat to their defensive positions, each vetoing further integration in those domains they dislike.

The past year, with the help of Draghi, has seen politicians continue their tried procession since the spring of 2010. Every time a crisis situation erupts (for example the collapse of the Spanish banking sector); they take a decision that is just enough to avoid disaster. Until now, they seem to succeed in this. By starting a process to fundamentally rethink EMU, they seemed to want to end this muddling and put the euro and its economy on a strong footing for once and for all. But looking back, we have to conclude that the real intention of starting this process, at the time of the Greek elections and the Spanish banking problems, was to make everyone belief in their determinedness to save the integrity of the euro.

The question for 2013 is if this ‘belief’ will indeed be enough. 2012 has seen the defusing of the explosive situations of Grexit and illiquidity-induced European banking sector collapse. But for next year, new obstacles stick up. Spain will have to borrow a staggering €207 billion in 2013, making further delay of applying to the ESM increasingly untenable. Elections in Germany make any further progress towards more solidarity (be it through banking resolution, deposit guarantee or a euro area budget) unlikely. While any lack of improvement in the employment and thus social situations in southern Europe (especially Greece and Spain) will lead to ever louder and possibly violent protest against more of the same austerity policies.

Will the past year have built enough confidence so that in this dire state both financial markets and citizens will keep believing that enough is in place to safe the euro and ensure economic improvement? We should hope so, because the ECB is now really at the limits of what it legally (and legitimately towards Germans) can do, while close to nothing could be expected from the side of the European Council with the German elections in sight. So 2013 promises to be another difficult year but with much less instruments left to react to troubles. Luckily, the challenges named above are pressing, but rather chronic than acute. It is very likely that we see a consolidation in 2013. For the optimists, those of us who are always looking at the stars, it means a consolidation of the euro, for the pessimists a consolidation of the crisis. Just as the Van Rompuy report (and the Commission’s Blueprint, and Verhofstadt and Cohn-Bendit’s plans) can be looked at as providing the guiding stars for further integration the next couple of years, or as proof of the galactic distance that these utopias are still away.

Merry Christmas!

Dr Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.