What has so awfully gone wrong in the Eurozone? In the aftermath of the financial crisis, European leaders only paid lip service to President Obama and PM Gordon Brown’s desperate pleas for setting up a combined stimulus strategy. Instead, Merkel and Sarkozy well-intentioned but misplaced crusade against speculation wholly missed its target. As systemic consistency always rests on a bet that rates will keep below an unlikely high level, should that happen the financial system will implode as events following Lehman Brothers discomfiture showed. Overconfidence in prudent risk coverage rather than wild speculation caused the carnage.
The eurozone also failed to acknowledge that lack of growth would dent banking balance sheets more deeply than any misbehaviour. The sovereign crisis also prompted an utterly ill thought reaction. Instead of bailing-out hopeless Greece, Germany put extra pressure on partners by pushing for early budget balance, eventually leading the Euro to the brink of collapse. Only Draghi’s bold intervention saved the day by pledging full commitment in salvaging the common currency, no matter the cost. A short-lived respite, as the Eurozone embarked on the extricate Banking Union agenda, growth falling into oblivion. The recession Southern countries suffered last year did little to change the course of events. Only when the downward trend has hurt core partners the Eurozone institutions seem ready to act.
Yet, the ECB’ comprehensive plan for injecting massive liquidity will barely help to redress the current sluggish economic performance unless demand takes off. Monetary policy alone seems unable to turn the tide. The more so, as real adjustment is wreaking havoc on employment, salaries and disposable income. Only a coordinated fiscal push increasing households’ purchasing power, especially in surplus countries, can do the trick. Unfortunately, there is no sign Europe will undertake such a move. All you can expect, for the time being, is a loose investment plan watered down by delays and second thoughts on financial involvement. The Eurozone is likely to fail once again in delivering growth.
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