x Abu Dhabi, UAEMonday 24 July 2017

Mayhem reigns for imperiled Europe

Hopes for a quick upturn for the euro zone should be extinguished. For anything better than stagnation or fractional growth this year would come as a surprise.

An analysis of the crisis in the euro zone suggests another tough year. Thanassis Stavrakis / AP Photo
An analysis of the crisis in the euro zone suggests another tough year. Thanassis Stavrakis / AP Photo

If 2012 was beyond serious doubt an annus horribilis for Europe - especially, though not exclusively, the single currency zone - only a super optimist could look forward to 2013 as an annus mirabilis in the making.

Sober analysis of the enduring debt crisis, with all the political and social mayhem it has caused, suggests another tough year lies ahead for both the 17-member euro group and the 27-nation European Union.

Last year ended with most of these countries struggling to overcome or even live with the consequences of recession. The new year is meant to be one of recovery but anything better than stagnation or fractional growth would surprise a broad sweep of economic observers.

For some, the continent enters 2013 in an even more perilous state in some respects than the one in which it leaves 2012 behind.

"Europe will be weakened by its economy and threatened in its unity," wrote Pierre Briançon, a French writer and economist in a column for the Reuters international news service.

Mr Briançon implies that euro-zone powers may seek to push Britain, and other nations reluctant to relinquish their own currencies, out of the EU.

This would have seemed unthinkable as recently as two years ago.

For France and Britain to fall out over Europe is hardly new.

But exasperation at the United Kingdom's selective adherence to the common market and its philosophies has spread noticeably.

There may have been some tut-tutting at the bluntness of the former French president Nicolas Sarkozy when, as long ago as October 2011, he told the British prime minister, David Cameron, at a Brussels summit: "You have lost a good opportunity to shut up … We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings."

All the signs are that Mr Sarkozy's political enemy and socialist successor, François Hollande, sees things in much the same light. And that is becoming the single currency area's collective approach.

Mr Briançon feels the question is not so much whether any country will abandon the euro "but whether the further integration of the zone will lead to the exit or de-facto ouster of a non-euro member from the EU".

"Powerful centrifugal forces are pulling non-euro members away from the EU," he wrote. "Some of them, such as the UK, never saw it any more than a one-dimensional 'single market' in the first place. But if it ever comes to a choice between a smaller EU and a stronger monetary union, it's easy to see what euro-zone governments will choose. 2013 could be the year when that choice becomes clearer."

One factor that promises to concentrate minds is the introduction of the so-called "fiscal compact" from this month.

This is the treaty on stability, co-ordination and governance that aims to strengthen monetary discipline and provide stricter surveillance within the euro area.

Signed in March, with a number of non-euro nations - though pointedly not the UK - on board, the main objective is to keep national budgets in balance or surplus. In practice, this "balanced budget rule" permits annual structural government deficits to rise to 0.5 per cent of GDP, but participating states are obliged to incorporate it into their legal frameworks by January 1 next year.

The rules, which allow for penalties of up to 0.1 per cent of GDP for compliance failures, are binding for the euro nations although countries such as Latvia, hoping to adopt the single currency, can opt in even before transition is complete.

Whether Europe's broader prospects will be brightened by the drive for financial rigour, the absence of which is held in large measure responsible for the current crisis, remains to be seen.

Voters in member states will be persuaded that progress is being made only when unemployment eases from its present record rates, confidence returns and household spending power improves. The markets will look for signs that the new measures are working.

The Wall Street Journal says the year will see a continuation of "extraordinary" attempts by central banks to breathe life into sluggish economic performance. The influential newspaper adds investors and analysts agree the actions of such institutions as the European Central Bank will determine how the euro fares against a background of poor economic forecasts. Little sign of a significant early improvement in output is expected following successive quarterly declines experienced during last year.

Mr Briançon predicts that the 0.4 per cent decline of the past year will be followed by stagnation, with few official forecasts offering better than "a spectrum that stretches from mild shrinkage to paltry growth".

At least in one area of the economy, however, the coming year is viewed in upbeat terms.

The American financial magazine and website Barron's acknowledges that the sovereign-debt crisis is far from over, with anti-austerity unrest in the two most troubled countries, Greece and Spain, and growth seemingly a long way off. But it says the time may be ripe for picking up bargain investments in European stocks.

"Despite lingering financial turmoil, doubts about the euro zone's sustainability effectively have been put to rest," writes Jonathan Buck, the European foreign editor for Barron's. "European companies are awash in cash, and many are positioned to benefit from growth beyond their borders. Not least, their shares are cheap … some investors think they could rally more than 10 per cent, and perhaps as much as 20 per cent in the coming year."