Is there really a crisis in the Eurozone?

(This is an unedited version of yesterday's Sunday Business Post column).

Is there really a crisis in the Eurozone? If you look at the behaviour of the system, clearly there isn’t. Greek Finance Minister Yanis Varoufakis was in Paris this week discussing new economic thinking and he didn’t appear too stressed out about the impending bond payment to the IMF which his country didn’t seem to be able to pay—right up until it did pay. How? The European Central Bank agreed to increase the ceiling on emergency liquidity assistance to Greek banks by 1.2 billion euros to 73.2 billion euros.

Yet again, everyone got excited about the prospect of a Greek exit, the Greek banking system’s collapse and the possibility of contagion. Yet again, nothing much happened. I’m not minimising the work that goes into maintaining the status quo—when you’re running to stand still, you’re still running—but no earth-shattering, life-redefining moments have taken place since Mario Draghi spoke the magic 3 words: whatever it takes, in 2012. So is there really a crisis? European stocks are at a 15-year high, thanks to Mr. Draghi. The weaker euro is also easing the threat of deflation. Instead of a collapse and a dramatic redefining of the European project, we have seen a very gradual expansion of the institutional architecture of the Eurozone, from its initial bailout mechanisms to a full banking union and the adoption of a much larger supervisory role by the ECB in Europe’s largest banks, all the way to the roll out of quantitative easing in recent months.

The reaction to the crisis has meant we are edging towards a United States of Europe. This makes a lot of sense as the flawed design of the links between national governments and the system of central banks within the single currency is primarily responsible for the crisis. In a sense, the route out of the crisis is pretty simple: the countries with a large, or let’s be fair, giant, trade surplus like Germany need to spend more and help the deficit countries grow faster. That’s what Keynes talked about when thinking about how countries should help one another balance things out when exchange rates aren’t there.

Asking Germans to spend more is a bit like playing tennis against a curtain. It just doesn’t matter how hard you try, it just ain’t going to happen.

Nothing in this diagnosis helps Greek politicians square the circle that right now, today, their state is deeply indebted to a set of institutional creditors who are less helpful than they should be, and probably more helpful than they legally can be. Confidence among industry, retail, and services has collapsed since the newly-elected Greek government took over in January 2015, as the graph shows. The tax take there has fallen, making repayment of any debt more difficult. Investors are not investing the Greek economy. Any reforms predicated on the economy generating a surplus of taxation revenue over government expenditure is now in jeopardy.

Confidence indicators by sector in Greece. Source: European Commission
Confidence indicators by sector in Greece. Source: European Commission

Concretely, the Greek economy needs short term financing combined with deep structural reforms to unlock yet more funding. Let’s parse that. It’s really important that we understand what the short term liquidity is desgined to achieve. It keeps the banks’ doors open. Nothing more. So in Paris, Minister Varoufakis admitted:

“in order to create the liquidity which is necessary to see these negotiations through hopefully to a sustainable solution, I have to make the same request that we are allowed to issue T-bills over and above a certain limit to create the liquidity necessary to see us through to the end of the month or the next month or June, so as to be able to redeem payments to the former troika -- to the IMF in this case.”

That’s nuts. The ECB has allowed more than 73 billion euros of emergency funding to keep the doors of the banks open, and not much else. It hasn’t much chance of seeing it back.

Beyond the short term financing, we should know that ‘Structural Reforms’, whatever form they might take, is French (or German) for pain. The word ‘reform’ in Greece is a dirty word. It means a Greek pensioner will lose their purchasing power, Greek unemployment will increase, and a generation’s potential will be lost. The Greek state is certainly to blame for these debts being run up, but its people will bear most of the brunt of the adjustment.

So is there really a crisis? The debts the Greeks owe to the IMF, ECB and other official funders are only being paid back with money created by the Greek central bank that the ECB allows. The circularity of this transaction is obvious. So don’t worry about it. Worry about exhaustion. First, the exhaustion that will come from the impact of structural reforms on the Greek people, and the exhaustion of the authorities in Europe, tired of dealing with a country it sees as recalcitrant and unwilling to change. The crisis might turn out to be a crisis of patience.