The next Eurozone crisis?

By Manal Lotfi

With a potential Greek debt default, warnings to Italy, questions in the Netherlands and uncertainty in France and Germany, fears are growing of an existential threat to the euro.

All the signs are there. Greece is in tough negotiations with the International Monetary Fund (IMF) and its European creditors with a potential default looming if a €7.4 billion debt repayment is not honoured in July. Talk of Greece’s exit from the euro as the only solution to the country’s deteriorating finance is being heard once again.  

The European Commission has warned Italy it could launch a sanctions procedure over the country’s growing debt if Rome does not adopt new belt-tightening measures by the end of April. In France, the growing support in the polls for Marine Le Pen, the National Front (NF) leader and candidate in the French presidential elections, only adds uncertainty to the future of the Eurozone.

Le Pen, a Eurosceptic, has promised to hold a referendum on France’s EU membership and a referendum to take France out of the Eurozone if she is elected president. Amid this uncertainty, an estimated €2.2 billion has been withdrawn from banks across the continent by panic-stricken depositors since the beginning of the year.

With high debt, low growth and dysfunctional banking systems in Greece and Italy, uncertainty in the Netherlands, and France and Germany facing crucial elections in the coming months, worries are building among investors that long-simmering debt troubles in Greece and Italy will put additional strain on the euro.

The potential for political upsets in France, Italy or Germany in this year’s elections is already making the Eurozone nervous. At a time of post-Brexit Europe and the presidency of Donald Trump in the US, this could trigger an existential euro crisis.

The shadows around the Eurozone’s stability increased with the Netherlands announcing a few days ago that its future relationship with the euro would be debated by its parliament following the elections in March. The announcement came after Dutch lawmakers commissioned a report on the currency’s future amid a rising tide of euroscepticism in Europe.

The report will examine whether it would be possible for the Netherlands to withdraw from the single currency and the possible economic and political outcomes of doing so. It will also look at “what political and institutional options are open for the euro” and “what are the advantages and disadvantages of each”.

Dutch lawmaker Pieter Omtzigt from the opposition Christian Democrats tabled the parliamentary motion calling for the report, passed unanimously by legislators. It was prompted by concerns that the European Central Bank’s (ECB) ultra-low interest rates are hurting Dutch savers, especially pensioners, and doubts as to whether its bond-purchasing programmes are legal, Omtzigt said.

Added to that are claims that the ECB is failing in its supervisory role governing Europe’s distressed banks. The findings of the report will be presented in a few months’ time, by which time the make-up of the parliament might have changed dramatically.

Most opinion polls show that Dutch voters favour retaining the euro. However, the eurosceptic far-right Freedom Party leader Geert Wilders, who has called for the Netherlands to exit the Eurozone, is expected to secure big gains in the parliament, though it is unlikely to win enough votes to form a government.

But even with the most probable outcome of the 15 March elections being a centrist coalition including the Christian Democrats, the future of the Eurozone remains far from certain. Most Dutch political parties have been vocal in their opposition to current ECB policies. “The problems with the euro have not been solved. This is a way for us to look at ways forward with no taboos,” Omtzigt said.

BELT-TIGHTENING MEASURES: The Netherlands’ decision comes at a tricky time for the Eurozone, with fears that 2017 might see even more trouble ahead.  

Days before the Dutch announcement, the European Commission warned Italy it could launch a sanctions procedure over the country’s growing debt if Rome did not adopt new belt-tightening measures worth at least 0.2 per cent of its GDP by the end of April.

The warning came after the latest round of the commission’s economic forecasts for the 28-nation bloc showed Italy’s public debt rising to an all-time high of 133.3 per cent of GDP this year, from 132.8 per cent in 2016 and 123 per cent in 2012.

The commission showed no signs of leniency as Italy is set to increase its huge public debt despite obligations to cut it. The market is so uncertain about Italy’s economy that some hedge funds are making bets that the price of Italian government bonds will collapse.

The warning increases the pressure on the Italian government led by the centre-left to adopt unpopular measures as the country faces possible early elections this year while Eurosceptic forces are on the rise. Any unpopular new measures will only increase the surge in Italy’s far-right party, the Five Star Movement, which with its leader Beppe Grillo is riding high in the polls. Grillo is promising to take Italy out of the Eurozone if his party is elected.

The predicament is clear for everyone to see. The EU is desperate to decrease the huge debt in Greece and Italy to save it from another crisis, but the austerity measures needed to tackle the debt feed into the rise of the extreme-right parties that want to destroy the European project.

To this should be added the potential of a Greek default on its debt. The country’s debt burdens have become progressively worse amid the stagnation of its economy, and its debt has increased to 183 per cent of GDP from 159 per cent in 2012. By next July, Greece must repay €7 billion of debt, but to be able to do so the country needs to receive the credit promised by the IMF and the members of the Eurozone in July 2015 to the tune of €86 billion.

Athens’ creditors are also demanding new austerity measures amid disagreements between the IMF and the EU. The austerity measures have so far led to cutting services, raising taxes, high unemployment, slashing public-sector salaries and the biggest privatisation programme in European history. New austerity measure could lead to catastrophic political and economic outcomes, and this is at the root of the disagreement between the EU and the IMF.

Last week, the IMF published a long-awaited report about the challenges the Greek economy faces. The IMF has argued that in addition to needed reforms Greece can only begin to recover if its €320 billion debt pile is reduced substantially. It has called for European governments to provide further debt relief to Greece to help the country’s economy to recover, noting that the current level of austerity is unsustainable economically and politically.

However, the Europeans, and Germany in particular, have rejected this notion, insisting that Greece’s economy is improving and that the government will be able to meet its debt obligations.

The differences between European creditors and the IMF is only one side of the problem. Recent studies have showed just how little countries such as Italy and Greece have benefited from being in the Eurozone, harming their economies’ competitiveness as exporters.

The reason is that the euro is overvalued for the Greek and Italian economies. By contrast, Germany has benefited from the euro which is undervalued with respect to the German economy thus increasing its competitiveness.

Growth in Greece and Italy has been zero, while the countries’ debts have ballooned. Greece is currently paying 6.1 per cent in interest to creditors as a share of its GDP, while Italy is paying 5.5 per cent.

The lack of investment, the debts, and the overvalued Euro make it very difficult for the poorer countries in the currency bloc to grow, and there are now serious questions about the future viability of the European currency.

There is only so much Germany can do to help. The ECB since last year has been purchasing European government bonds and other assets to give confidence to the market. With encouraging signs of economic growth across Europe, the Eurozone has also managed to overcome certain political volatilities such as the Brexit and the Italian referendum which led to the resignation of Italian prime minister Matteo Renzi.

But investors are increasingly concerned about how Europe will be able to cope with escalating debt pressures in Italy and Greece. As European governments continue to sell bonds, investment funds are reassessing the risks of holding these securities. Amid such mounting concerns, it may be that only a major restructuring of the Eurozone will be able to help resolve the problems facing its countries.

© Al Ahram Weekly 2017