{"id":36160,"date":"2022-10-26T14:36:52","date_gmt":"2022-10-26T14:36:52","guid":{"rendered":"http:\/\/www.brandon.ddtest.info\/multisite-test\/is-a-crisis-brewing-in-the-eurozone\/"},"modified":"2022-10-26T14:36:52","modified_gmt":"2022-10-26T14:36:52","slug":"is-a-crisis-brewing-in-the-eurozone","status":"publish","type":"post","link":"http:\/\/www.brandon.ddtest.info\/multisite-test\/is-a-crisis-brewing-in-the-eurozone\/","title":{"rendered":"Is a crisis brewing in the Eurozone?"},"content":{"rendered":"

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Chart<\/p>\n

07:00<\/p>\n

A repeat of 2012 is the last thing the currency union needs<\/h5>\n

by Peter Franklin<\/span><\/p>\n

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Credit: Getty<\/p>\n

Absolutely the last thing that Europe needs right now is another Eurozone crisis. Anything that destabilises the single currency, destabilises the European Union \u2014 and Vladimir Putin would just love that.\u00a0<\/span><\/p>\n

The danger in any time of trouble is that the markets lose confidence in the weaker Eurozone economies \u2014 especially those of Greece, Italy, Spain and Portugal. The key metric here is the interest rate at which different members of the Eurozone can borrow from the money markets. If the difference in the respective rates for, say, Greece and Germany grows, then that means that markets see lending to Greece as increasingly risky.\u00a0<\/span><\/p>\n

If the gap or \u201cspread\u201d gets too wide, then lenders begin to worry that the weaker economies might default on their debts or even that the single currency might collapse. As we saw during the first Eurozone crisis, fear feeds upon fear, requiring extreme measures \u2014 like the permanent austerity programme imposed on the Greeks \u2014 to restore confidence.\u00a0<\/span><\/p>\n

Given the current talk of recession, is there any sign that a second Eurozone crisis might be brewing? A chart<\/a> tweeted out by Robin Brooks shows that the spread between German government borrowing costs and those of the Mediterranean countries is getting wider again:\u00a0<\/span><\/p>\n

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Credit: Robin Brooks<\/figcaption><\/figure>\n

So far, the spread is narrower than the last time the markets took fright \u2014 i.e. the start of the Covid pandemic two years ago. However, the Eurozone authorities were able to provide the necessary reassurances and the panic was short-lived. In theory, they should be able to keep a lid on things this time as well. But there\u2019s a complication.<\/p>\n

In 2020, the European Central Bank \u2014 like central banks elsewhere \u2014 was able to use quantitative easing (i.e. money printing by electronic means) to fund the purchase of debt from Eurozone governments. But in 2022 there\u2019s much more reluctance to use this option. That\u2019s because of the danger of inflation. Unlike in 2020, there are no lockdowns to suppress consumer demand. Furthermore, there are multiple disruptions to the supply of vital commodities. This is no time for central banks to be funding public deficits with funny money.\u00a0<\/span><\/p>\n

So if governments can\u2019t rely on quantitative easing, how are they going to survive a recession? They could borrow from the money markets instead, but that will put upward pressure on interest rates \u2014 especially in the most vulnerable economies.<\/p>\n

Alternatively, governments could put up taxes and cut spending. However, countries like Greece have already suffered years of extreme austerity. To impose savage cuts at a time of faltering growth is likely to make any recession worse.\u00a0<\/span><\/p>\n

Of course, a currency devaluation would help \u2014 allowing a struggling economy to export its way to recovery. However, the Eurozone has taken that option away from its members.\u00a0<\/span><\/p>\n

Indeed, the EU appears to be rather short of options. At a time when Europe should be focused on external threats, it is once again distracted by its greatest internal weakness \u2014 the single currency.\u00a0<\/span><\/p>\n

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