The recent reduction in the likelihood that one or more countries will leave the euro reflects the European Central Bank’s (ECB) pledge to do “whatever it takes” to save the single currency. But, there is still huge uncertainty over whether the ECB will follow up its words with decisive action. Problem countries like Spain are understandably reluctant to accept the onerous conditions that support from the ECB (and the bailout fund) would demand. And, in buying sovereign debt to bring down government borrowing costs, the ECB would only be tackling a symptom of the crisis anyway – not the underlying causes of uncompetitiveness, chronically weak growth and cripplingly high debt. With governments making little or no progress towards addressings those problems, the chances of at least one country leaving the euro – by choice or expulsion – remains high.
Jonathan Loynes is chief European economist at Capital Economics.
There is no shortage of chatter about economies being forced out of the Eurozone. But this will not happen in a hurry. Europe’s leaders are determined to hold the euro together. But, more fundamentally, it is hard to overestimate the complexities of a country abandoning the euro in favour of a new (or old) currency. The euro is in trouble. Measures taken to reduce public spending are both unpopular and painful during a period of weak growth or no growth at all. But the alternative, a collapse of the euro, is no more attractive. One weak country leaving would lead to a massive capital outflow and destabilisation. And most European leaders have signalled their determination to keep the project afloat at all costs. The experience of recent years is that, while consistently short of a lasting solution, these leaders can be relied on to do just enough to keep the currency above water.
Stephen Barber is an academic and economic adviser to Selftrade.