Two sets of numbers tell a contradictory story about the euro zone.
Economic data point to improvements by the month, even by the day: growth is picking up and the borrowing costs of even the most indebted countries keep falling.
The crisis is over, say some Eurocrats.
By contrast, polls ahead of this month’s European elections point to political upheaval.
Voters are exasperated with their governments and with Europe; anti-establishment groups are on the rise and may come top in some places.
Europe may be about to test de Tocqueville’s contention that the most propitious time for revolution is not when conditions are worsening, but when they start to improve.
“Evils which are patiently endured when they seem inevitable become intolerable once the idea of escape from them is suggested,” he wrote.
Having witnessed the evils of falling living standards and mass unemployment, and with a general sense that citizens have had to pay to save banks (all worsened by leaders’ mismanagement of the crisis), there are signs that escape is at hand.
This week euro-zone finance ministers congratulated Portugal on making a “clean exit” from its bail-out, forgoing the safety net of a precautionary loan.
In following the examples of Ireland and Spain, Portugal is perhaps being reckless. If these countries run into trouble, they will be able neither to draw quickly on loans nor to rely on the backstop of the European Central Bank, whose never-used bond-buying policy, Outright Monetary Transactions (OMT), depends on there being a formal programme. But politics has trumped prudence.
Debtor countries can claim to have rid themselves of the hated “troika” (the ECB, the European Commission and the IMF); creditors can claim vindication for their policies of austerity and structural reform.
Greece and Cyprus remain under programmes. Euro-zone ministers belatedly acknowledged that, after years of austerity and a deep slump, Greece has at last achieved a primary budget surplus (ie, before interest payments).
Under a promise made in 2012 but delayed until after the European election, the euro zone will consider if Greece needs more help to bring down its vast debt. Nobody will talk of a write-off. Instead ministers may “extend and pretend” by stretching out already-long maturities.
The recovery is gaining strength, with modest but accelerating growth expected in the euro zone this year and next. Cyprus, the only country still in recession, is likely to grow next year.
Unemployment has peaked. Investors are rushing into peripheral European debt. Yields on ten-year bonds for Italy and Spain have dipped below 3% for the first time since the euro began (though that partly reflects very low inflation). Last month Greece returned to the bond market for the first time in four years.
Yet markets are in danger of reverting to the folly of the first decade of the euro, when investors paid almost the same price for the debt of Greece as of Germany.
There are good reasons to restrain the euphoria. The prospect of a chaotic default and the break-up of the euro may have receded, but economic problems are far from over.
Debt levels have risen sharply, growth is sluggish and unemployment is worryingly high. More than a quarter of workers are out of jobs in Spain and Greece. Bank lending, on which euro-zone firms are still dependent, is shrinking. Similar companies in neighbouring euro-zone countries pay widely different interest rates. With inflation consistently below 1%, troubled countries will struggle to close the competitiveness gap with Germany and work off heavy debts.
The prospect of even more damaging deflation is uncomfortably close.
Europe faces three interconnected risks: prolonged stagnation, reform paralysis and political backlash. Especially in southern Europe, growth will be sluggish at best and joblessness will remain high for many years.
Despite the arrival of energetic new prime ministers, France and Italy have yet to make a convincing commitment to liberal reforms, while Germany is unapologetic about running a large demand-sapping trade surplus.
Beware Of Reform-Phobia Too
The euro zone, too, is shy of change. The ECB has dragged its feet over unconventional measures like quantitative easing to fight deflation.
Other European Union institutions are in pre-electoral doldrums; there is a good chance of stalemate over the choice of a new commission president. There is little energy left for measures to strengthen the euro zone through greater risk-sharing, or to boost growth by deepening the single market.
Negotiations on an ambitious transatlantic trade deal with America are losing steam (also because of nervousness in America).
One reason why European politicians are worried about further reform is the fear of populism. Eurosceptic parties are leading the polls or running second in France, the Netherlands, Greece, Italy and in non-euro Britain and Denmark.
Talk of leaving the euro zone is resurfacing. Silvio Berlusconi, a former Italian prime minister, has said Italy and other countries might have to give up the currency unless the ECB loosens monetary policy.
And in Finland, a creditor country, a paper published by a group of economists this week suggests that it would be better to leave the euro lest Finland gets dragged into a more federal system with joint liabilities such as Eurobonds.
If markets once seemed ready to push the weakest countries out of the euro, now it is voters who may pull their escape cord.
With a primary surplus, Greece no longer needs to borrow for itself; so it could now more easily default on its debt.
Support for the European project, always fragile, will keep falling if it fails to deliver greater prosperity. Europe’s leaders still face testing times. As de Tocqueville put it, “a sovereign who seeks to relieve his subjects after a long period of oppression is lost, unless he be a man of great genius.”
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