Brexit and Donald Trump have occupied a near-permanent place at the top of the news agenda in recent years – and not without good reason. Before they arrived, however, the Eurozone debt crisis was being held up as a defining issue of our times – with fears it could spark widespread economic upheaval and possibly even the collapse of the postwar peace project. While our backs have turned has this crisis been resolved, or might this yet have the gravity to knock Brexit and Trump off the headlines?
At a base level, you might be forgiven for thinking that the story ended in August. It was at this point that Greece finally exited a controversial bailout programme that had been designed to stop it spiralling into a full-scale crash.
Yet the completion of the bailout programme may only end up being the end of the beginning of the crisis.
Even from a purely Greek perspective, while its economy grew 1.4% last year, its period of enforced austerity left the Greek economy 25% smaller than 2008. Unemployment sits at 20% and debts still total about 180% of GDP. Whether or not any of those numbers mean that Greece has a sustainable economic future is a question waiting to be resolved.
But it’s wrong to see the Eurozone crisis solely as a Greek issue. Indeed, in 2018 the attention turned firmly to Italy. A general election resulted in a hung parliament and then 88 days of talks eventually leading to a coalition government being formed by the League and Five Star Movement, both of which had espoused anti-EU and anti-Euro sentiments during their respective campaigns. That hostility rose to the surface during a row with the European Commission over Italy’s budget, in which the government eventually compromised to cut its spending plans.
Research into the twists and turns post 2009 by DailyFX shows that the Euro has far from recovered to its pre-crisis levels. In fact, 2018 saw a reversal of the modest uptick in performance for the continent’s common currency in 2017.
Many feel that the decisive action needed to address the structural issues that underpinned the crisis has still yet to be taken – and that this political indecision ensures the crisis rumbles on.
In December, EU leaders did agree a deal to try to boost the long term health of their currency union, including measures to boost the bailout fund (the European Stability Mechanism). However, issues such as collective deposit insurance and a separate eurozone budget remain. As Grace Blakeley noted in the New Statesman: “The reality is that, while EU leaders tinker around the edges, the euro’s fundamental contradictions endure.”
This, however, brings us to the thorny issue of politics. It’s impossible to separate the crisis from the political backdrop – and indeed this is where Trump and Brexit overlap with the Eurozone’s issues. A belligerent President who threatens a trade war has the power to destabilise matters, while the departure of the UK from the EU on terms that are still yet to be decided is another cause for concern and caution.
The EU is wary of pushing anyone else to join the UK out of the exit door but that involves a balancing act. The UK’s departure needs to be smooth enough to avoid economic issues for the rest of the 27, while still not looking like an attractive option to take.
Yet the rise of populism is not restricted to Brexit and Trump. Italy, as we’ve seen, has turned to a form of populism, while Austria, Germany, France, Holland and beyond are all seeing their own populist surges and each of these make life tougher for European leaders both domestically and on the European stage. May’s European Parliament elections will be instructive when it comes to seeing just how much influence the populists can wield on the EU itself but it’s perhaps only natural that leaders are cautious about how to proceed.
Politics and economics are intertwined and especially so when it comes to the future of the Eurozone. Reforms that decisively tackle the contradictions at the heart of the euro – a single currency that has no fiscal union – require political will. Without this, the underlying crisis can be expected to continue.
Yet it’s important not to get too carried away. The euro has proved to be a resilient currency and the action taken by leaders has been enough to halt the decline. Investors see the currency as second only to the US Dollar as a safe liquid asset in an uncertain world of trade – and there’s not yet a decisive tide to replicate Brexit across the continent.
We’re at a crossroads with the Eurozone crisis. It’s not over yet, but its seriousness and longevity depend on what happens next. Indeed, Cambridge professor Brendan Simms sees parallels with the present situation and the Reformation of 500 years ago. If he’s right, Brexit and Trump may be footnotes in this story rather than the other way round.