There isn’t just one euro crisis. There are four. Each could probably be managed on its own. But the combination increasingly looks toxic.
The least significant problem is economic. Indeed, it’s hardly a crisis at all that GDP in a rich region with balanced trade and strong institutions is growing slowly. In any case, reforms are on the way — quite big ones in Spain and smaller ones in Italy. More could be done fairly easily.
Weak national governments pose more serious problems. The leaders of both lender and debtor nations are finding it difficult to persuade voters that European unity is worth enduring some pain. They are even finding it difficult to persuade electorates that European disunity would lead to much greater pain. Still, the political weakness shouldn’t be exaggerated. The majority of voters continue to vote for pro-euro zone parties. And at each stage of the crisis, each government has ultimately made the promises and commitments required to keep the single currency intact.
The third crisis is shortage of European solidarity. Neither the European Central Bank nor the EU authorities has been strong enough to set a clear agenda for emergency measures, burden-sharing and bank and fiscal integration. That said, and though the institutions are hardly impressive, they are functioning adequately. The right things have been done, if only the minimum necessary and at the last minute.
The most toxic crisis is in investor psychology. Investors seem to suffer from perma-fear about the euro’s future. Their frightened responses —demanding higher yields rise and withdrawing funds from weak countries — only make the situation more frightening. But up to now, national and regional authorities have been able to respond adequately with promises on deficits and reforms and, when necessary, regional and central bank financing.
Stronger economies, new political rules, greater solidarity and investor confidence are not built in a few weeks. But the euro zone could well collapse if frenzied investors aren’t neutralised in a few months. To prevent that, the authorities need to pull together enough to inject the markets with a potent tranquiliser. The time for unlimited monetary financing may be fast approaching. The belief in endless liquidity keeps investors fairly calm in the UK and United States. It would do the same in the euro zone.