Who'll pull the trigger on the eurozone?

One of the most oft-quoted sayings in economics is Herbert Stein’s famous dictum that if something cannot go on forever, it will stop. It is so often quoted because it is logically true. It certainly holds for the construction of the eurozone and the design of those policies to rescue it.

Regrettably, Stein did not specify how such unsustainable mechanisms come to an end. But recent developments in the euro crisis suggest a gradual process culminating in a tipping point. We may be nearing this moment.

I have lost count of the emergency summits on Greece over the past few years, but last week’s summit ended like all the dozens of summits before.

Wolfgang Schuble, the German finance minister, called it "a good result” that parliaments should now approve. Greek Prime Minister Antonis Samaras poetically spoke of "a new day” for all his fellow countrymen, and even IMF chief Christine Lagarde applauded a "satisfactory solution” for Greece.

So in short, it was business as usual. The same statements we have heard for the past three years, from mostly the same politicians, for still the same basic problem: to save Greece from imminent sovereign default.

And yet something was different. There was no sigh of relief, let alone euphoria about the result. Markets were not impressed by the new lifeline for Greece; media commentators did not pretend that this was more than a stop-gap measure; and opposition in the richer euro countries against a continued bailout for Greece is visibly growing.

As if that was not bad enough for the professional euro rescuers, the downgrading of the EFSF and the ESM funds by ratings agency Moody’s a few days later signalled that time for (dare I say: traditional?) euro stabilisation policies is running out.

Taking away all the official gloss put on the euro policies over the past three years, the results are less than convincing. What started with a local crisis in a small country on the European periphery has become a seemingly permanent state of emergency for the whole of the eurozone. As a result of the European Union’s stubborn policies, the problem grew larger, engulfing more countries along the way.

It also grew bigger. Remember how initially the Greek problem seemed solvable by just a few billion euros of assistance? By contrast, the current rescue mechanisms including the two bailout funds (EFSF and ESM), combined with the measures taken by the European Central bank like Target 2 and the indirect LTRO bank bailout, can be counted in the trillions of euros.

If only there were signs that the European economy was moving in the right direction, namely towards recovery, perhaps those enormous sums of money mobilised for the stabilisation of the euro could be more easily accepted. Yet all economic indicators point towards an ossification of the crisis. To find any traces of eurozone growth requires a magnifying lens, while unemployment within the currency bloc has reached 11.7 per cent. A staggering 18.7 million people in the eurozone are without a job – and this is only the official figure. Hidden unemployment is much higher.

Clearly, then, Europe is the sick man of the world – no matter what Schuble, Samaras, Lagarde and co try to pretend. Since there are no signs of improvement but indications of deterioration, this leads us back to Stein’s observation. If it is such an unsustainable state of affairs, when will it ever change? And what will be the trigger?

To my mind, there are two such triggers for the euro crisis. Both would have the potential to fundamentally change the big picture, and both are looking more likely after the events of the past few weeks.

The first such trigger is a realisation by market participants that those countries underwriting the bulk of the eurozone’s rescue mechanisms are not nearly as strong as previously believed. Although formally both the EFSF and the ESM are guaranteed by all eurozone members, in effect only two of them really matter for the trust in these institutions: Germany and France.

The other countries are either too small to make a difference (e.g. Luxembourg, Austria or Finland), or nobody ever believed that they would contribute to these funds anyway (e.g. Portugal, Spain or Italy). Finally, there are countries that are both too small and too poor to pay for others (e.g. Cyprus or Malta). This really only leaves Germany and France.

With Moody’s downgrade of France’s rating, we may have entered a phase in which the economic health of the two bedrocks of the eurozone is being questioned. This also explains Moody’s downgrade of the euro rescue funds. It may only be the beginning. If Germany goes into recession next year, as a growing number of analysts now forecast, the spotlight will be on the supposed anchor of the eurozone.

On closer inspection of the Germans’ long-term fiscal and demographic projections, it should become apparent quite quickly that they are in no position to bail out the rest of Europe. In coming years they will be busy enough dealing with the effects of their own ageing and shrinking population.

There is a second trigger that could bring all previous stabilisation strategies to an end: When they finally cost the guarantor countries hard cash.

Last week, the German public got excited about the fact that with the amended measures for Greece, the bailout of the eurozone periphery will (for the first time!) actually cost them real money. The federal budget will take a hit of €730 million next year. It may seem bizarre, but many Germans were genuinely surprised that bailouts cost anything.

That surprise will turn into astonishment and anger when they discover that those measly €730 million were only the beginning of a much bigger bailout. Faced with cash demands in the dozens of billions, how likely is it that political majorities will still be found for such programs? At last week’s parliamentary vote in the Bundestag, there were already a record number of 'no' votes and abstentions.

The eurozone in its current form is not sustainable, certainly not with the current bailout policies. Will markets realise that no country can effectively guarantee its survival? Or will the guarantors finally understand the burden of their commitments? We will find out over the coming months.

Dr Oliver Marc Hartwich is the executive director of The New Zealand Initiative.

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Oliver you do seem to be missing many salient points (Who'll pull the trigger on the eurozone? December 6);
1. The EFSM and ESM are supported by France and Germany in percentage terms to around 50 per cent, neither France nor Germany together fund 100 per cent.
2. Those 2 funds were down graded simply because Spain and Cyprus are expected to make draw downs soon and together with Greece they may not hold enough funds for everyone wanting funding.
3. You have gotten an entirely wrong handle that $730m Germany is to lose, that money came from profits Germany made on trading Greek debt.
4.You might have noticed that Greek bonds went as low as 16 per cent FV and the current rise to 35 per cent FV is profit Germany will forgo.
5. The lose of profit is what Germany loses. Morally Merkel is claiming the high ground by not accepting Profit at Greeces expense.
Now one can speculate as many do, that Greece will need a further Debt write down which will include all EU countries taking a hit.
But let's not forget the IMF who aren't part of the EU and are charged with stepping in to get a country on a recovery pathway and that Greece is now on a recovery pathway.
And Lagrade has been busy getting Greek debt onto a recovery pathway...you might begin to think that the EU will hand Greece over to the IMF very soon.
If Greece then defaults the IMF steps in....Then what...go on tell me, one way or another Germany will pay.
An article that states the truth. Greece and other debtor nations that do not balance the books,and who do not want to balance the books should never have been propped up by the more fiscal prudent nation,germany.Let us hope that the politicians in germany or any nation that rewards fiscal imprudence will be suitable punished by the long suffering taxpayers.The EU is another fantasy that was doomed to fail (Who'll pull the trigger on the eurozone?, December 6).
There will be no success with fixing Europe's problems until it is grasped that the core problem is social structure rather than "economic". (Who'll pull the trigger on the eurozone?, December 6). Economic tinkering will fix nothing. The changeover to a united currency is not the cause of the present problems, rather it was another attempt to solve them without making the vital changes to social structure. And of course that is why the Euro weasel went pop
Europe has a massive population that is split between strata of rich, comfortable, subsisting and desperate. The power ratio that counts is that between the rich and comfortable on the one hand and the subsisting and desperate on the other. Since the rich and comfortable do not have an absolute numerical majority, the gap is filled through the use of propaganda aimed at securing lower class electoral votes, utilising media owned by the rich - the manipulatable "swinging" voter
It is all very basic political science. The numbers of the comfortable are also increased using wage and salary parities - creating an artifical scale of values for work. Productive work is actually often the worst paid apart from toilet cleaning and waitressing
It is not the nature of the currency that is the problem but its distribution. Present distribution is unsustainable when pressures on the poorer sector become intolerable to them - because this results in the smokescreen of media propaganda being seen through and the real nature of the poor's desperation, dispossession and disinheritance being perceived by them. You see the results in the streets of Europe's capitals
The solution - the only solution - is vast radical social reform that redefines the aims of Europes political and economic structures. It is not so much that greater equality in wealth division, however achieved, is morally and ethically desireable - rather it is that nothing else will provide the social stability on which a functioning private enterprise sytsem can be built and sustained. Swallow that pill!
The terms of the Maastricht Treaty have not just been breached, they have been shredded (Who'll pull the trigger on the eurozone? December 6).
The German people will shortly realise that their credit of approximately 730 billion Euros under the Target 2 balances, growing at about 1 billion Euros a day, is real money which they are not going to get back.
Interesting article. Great comment Phil Clarke, I agree entirely. (Who'll pull the trigger on the eurozone? December 6.)
There is just too much mistrust between the nations of Europe for quick solutions to be agreed on major structural weaknesses.European history includes the 100 Year War, The 30 Year War and the French Revolution which lasted from the fall of the Bastille in 1789 to Napoleans final defeat at Waterloo in 1815 during which time virtually the whole of Europe had been engaged in war (Who'll pull the trigger on the eurozone? December 6). Any body who believes that there can be sufficient trust between Europeans to arrive at quick solutions to the problems of the Eurozone hasn't read much history.
I re read the comment by Dr Oliver Marc Hartwich.and once more comment that he has expressed exactly what is and is going to happen in Europe (Who'll pull the trigger on the eurozone? December 6).
There are going to be a lot of problems which cannot be solved by Germany alone. The euro is terminally tainted, and the sooner it is killed off, the sooner the sensible process of countries looking after their own business can begin.