The year of 2012 will be remembered because it was, precisely twelve years after the common currency had come to life, when the euro faced more criticism and doubt than ever before over its survival. Economists, investors and other market agents seemed to agree that the euro would fail.
In fact, some well-known global banks put a date to the euro’s death through the chief economists signing their gloomy technical financial reports, while their experts relentlessly spoke of the exit of Greece from the euro area. Grexit became a popular word almost everywhere.
Yet, nothing of the like has happened. Greece maintains its euro membership, and the possibility of leaving the eurozone is eyed by not one of the euro countries.
Furthermore, risk premiums on Spanish and Italian debt have relaxed. The cost of credit is high, there is no discussion about it, but it is stabilised at something close to acceptable levels. Could we now believe that the eurozone is out of danger? What was the mistake the doom-sayers made when they forecast the breakup of the euro?
In truth, the European Central Bank appeared to be an unlike saviour of the southern European economies, tied to the German orthodoxy. Against all predictions, though, governor Mario Draghi dared to take a step forward and announced the ECB would buy sovereign bonds of those governments that asked for.
It was this move by the ECB that distorted all estimates. Otherwise, we would be referring to the euro zone as a thing of the past.
So our troubles aren’t fixed and haven’t vanished. Draghi offered just a temporary, small plaster. Indeed, nobody is today sure about how the central bank would really act if it was necessary. The German central bank, the Bundesbank, does not endorse those virtual ECB plans, which are plagued with lack of detail and precision. No wonder investors doubt again about the whole endeavour.
In addition, Germany’s GDP seems to be losing steam and France’s risk qualification is in danger of being downgraded. Their banking systems, too, are in worse shape than thought, as it happens with the rest of the European financial industry.
As for Spain, our harsh banking restructuring process has revealed its weaknesses and unbalances, mainly triggered by the smaller entities and a big group recently created, that is, Bankia. Their faults, and a very wrong communication strategy, infected banks that are sound and left a big, nasty cloud over the health of the general economy.
Meanwhile, Germany wants its regional banks out of the ECB supervision and France may need a banking rescue–according to the International Monetary Fund–of well above the €40 billion Spain has received.
The toxic assets aren’t just linked to real estate and construction companies, but to sovereign debt holdings, too. Which is why, without a Banking Union–an option Berlin detests–any bailout of a bank will increase the public debt burden, deteriorate the risk grade of government bonds, and restart the whole euro nightmare.
Our economic recovery will only become reality when credit begins to flow again, and when the needs of the European banks are tackled with a true union. Until our private sector can access investment and credit, the current obsessive austerity policies will simply be useless.