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28 January 2013

Whatever happened to the Eurozone crisis?

Some things are just so last year: Gangnam Style, hosepipe bans, Mitt Romney and, of course, the Eurozone crisis.

You remember the Eurozone crisis, don’t you? For a while it was all a bit touch-and-go, with the money markets threatening to cut off the flow of credit to countries like Spain and Italy. But after a series of ineffectual, half-hearted bail-outs, the Germans were finally persuaded that something serious had to be done – which was to allow the European Central Bank to buy as many bonds as required to stop the 'peripheral' members of the Eurozone from going under.

When Time magazine named Barack Obama as its ‘person of the year’, some people said the honour should have gone to Mario Draghi, the ECB president who brokered the Eurozone deal.

However, as Ambrose Evans-Pritchard reminds us in the Daily Telegraph, the Eurozone crisis isn’t over, it’s just entered a new phase. The banking systems of vulnerable countries may be on indefinite life support, but the same cannot be said for the real economies and ordinary people of those nations:

  • “By any measure half of Europe is now in a great depression, less acute than it was for the same bloc of states in the early 1930s (America is another story) but more protracted and ultimately deeper.”

With the youth unemployment rate pushing 60% in Spain and Greece, this is no exaggeration. Unable to devalue or print money, these countries are caught in a deflationary trap – more so than ever thanks to the de facto banking union initiated by the Draghi deal.

But can’t the peripheral member states loosen up their labour markets and boost employment that way? Well, this hasn’t helped much in Ireland:

  • “Ireland has one of the world’s most flexible labour markets yet its jobless rate has risen from 4.6pc to 14.6pc, and that includes the safety valve of massive job flight to the UK, US, and Australia."

An even in countries like Spain, labour markets aren’t as rigid as supposed – characterised as they are by two-tier structures in which the feather-bedding of workers only applies to those on permanent contracts:

  • “Spain’s rate has jumped from 7.8pc to 26.6pc in four years, or 55.8pc for youth. This has occurred very fast precisely because it is easy to sack Spanish workers on short-term contracts.”

The real culprit according to Evans-Pritchard (and, it seems, the European Commission) is a “demand shock”: Despite the Eurozone, “Italian and Spanish companies still pay twice as much to borrow as German rivals”, but because of the Eurozone they share the same exchange rate. Add that to the impact of austerity (unsoftened by the option of quantitative easing) and one can only conclude that these economies don’t stand a chance.

Surely, something’s got to give. By exempting the financial system from the pain suffered by ordinary people, the Eurozone elites are confident they can hold the markets at bay. They may be right. However, there is one thing that the Draghi deal doesn't quite sew up:

Ordinary people still have votes.


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