Stand by for another euro crisis

A placard is seen during a protest against the visit of European Central Bank (ECB) President Mario Draghi in Lisbon Image copyright Reuters
Image caption European Central Bank president Mario Draghi wasn't welcomed by all in Lisbon

The European Union is staggering in the ring, like a bloodied boxer, taking punch after punch, staying just about upright, not because of improbable belief in victory but through the unacceptability of the alternative.

Just as the migration crisis eases, Berlin and Paris brace themselves for another blow - the possibility of the UK leaving the EU.

The Ukraine crisis is almost forgotten, but those Dutch who could be bothered to vote have rejected an ever-growing union.

So it is hardly the best time for an old horror to remerge - Euro Crisis 2.

But that is what is on the cards.

Mutterings from Portugal, news from Spain, Italian woes and Greeks refusing to bear gifts to Berlin all point towards a difficult summer.

Like the final shot of a horror movie, a creepy hand thrust up from the ground, there is new evidence the monster never died.

Of course, we all knew the euro crisis was never solved, merely shelved.

But German-driven austerity is becoming more irksome to governments elected to oppose it, and the European Central Bank (ECB) is taking notice, to the dismay of politicians in Europe's biggest economy.

North-south divide

At a recent conference of academics, investors and policy makers, I was struck that just about everyone agreed the state of the euro was a critical problem and the European economy was in deep trouble.

Nearly everyone agreed the euro was unsustainable without big changes. That is where the unity ended. Everyone had different solutions, none of them, to my mind, very politically palatable.

Image copyright Getty Images
Image caption Austerity continues to inflame passions in Greece

If the euro crisis returns, it will be because policy makers can't or won't face the conundrum at the heart of the single currency - the shackling together of very different economies with very different needs.

It is a north-south divide which boils down to Germany against the Latin countries.

Is Germany dragging down the eurozone?

How bad are things for the people of Greece?

How has austerity worked out for eurozone countries?

Italy's Matteo Renzi - PM in a hurry to reform

The negotiations about the latest round of the Greek bailout are increasingly fractious.

Even as it imposes more pain on its people, through tax rises, the Syriza government is unwilling to knuckle under and give in to demands for yet more cuts to service its debt.

The troika - the International Monetary Fund (IMF), the European Commission and the ECB - can't agree on what they should do anyway.

The IMF prescribes more debt relief, but doesn't want to finance it. If it were to walk away, Greece would be back in the critical ward.

This was always going to be an epic tussle. The Greek government is, of course, in a tricky position, elected first to oppose austerity, then, a few months later, to implement it.

Economic forecasts for 2017:

  • UK: 4.9% unemployed; gross public debt 88.2% of GDP
  • Germany: 5.2% unemployed; gross public debt 66.8% of GDP
  • France: 10.3% unemployed; gross public debt 97.1% of GDP
  • Italy: 11.3% unemployed; gross public debt 130.6% of GDP
  • Spain: 18.9% unemployed; gross public debt 101.1% of GDP
  • Portugal: 10.8% unemployed; gross public debt 127.2% of GDP
  • Greece: 22.8% unemployed; gross public debt 181.8% of GDP

Source: European Commission

But a devastating Wikileak has poured fuel on the fire. It appears to show the IMF pondering a plot to crash the Greek economy.

It all makes for an interesting meeting of eurozone finance ministers.

A new crisis could be just a couple of missteps away.

The left are drawing broad lessons from the leak. Paul Mason, unleashed from the constraints of broadcasting neutrality and its linguistic restraints, has suggested this proves the global elite don't care about real people.

That perception is at the root of the southern revolt against Germany. For Greece is not alone.

Image copyright Getty Images
Image caption Portugal and Greece have joined forces to demand an end to austerity

Recently the new left-wing Portuguese government joined forces with Greece, demanding a change of policy.

Portuguese Prime Minister Antonio Costa declared: "We have taken an aspirin but the disease is still there. And the disease is that there is no symmetry between our economies and we must further strengthen convergence among European Union states."

That is a direct challenge to German orthodoxy and one that has some politicians there in despair.

I heard one German minister recently ask: "What does that mean? Build a 20th regional airport that no-one wants? Or tell people in the US and Asia to stop buying our cars and hi-fis?"

Spain has also recently joined the anti-austerity club.

Its economy is symptomatic of the southern dismay.

They did all the "right" things under a conservative government - and have earned great praise from some quarters. But now growth forecasts are down again.

If a new government is eventually formed between anti-austerity Podemos and the Socialists, they are highly unlikely to want to make more cuts simply to service their debt.

Italy concern

But it is Italy that is the real worry. Its huge banking crisis has gone largely unnoticed.

Perhaps there has been too much else going on, perhaps like much of this it is too complex for easy consumption, but it is very real.

Italy's energetic but beleaguered Prime Minister Matteo Renzi has stood up to Germany's Chancellor Angela Merkel over a variety of subjects, most recently over her rejection of his idea of a "euro bond" to pay for the migrant crisis.

Image copyright AP
Image caption Matteo Renzi has taken a robust line with Germany's Angela Merkel

As ever, the German fear was that they would be left holding the baby - or at least the bill for the baby.

But that's a sideshow - the basic problem is that EU state aid rules stop Mr Renzi dealing with the bad banks in the way he wants.

He gets some kudos, and so a little leeway, because he has carried out the "structural reforms" so beloved of the financial elite - a bland term which largely means making it easier to hire and fire people.

But the strains in the EU's fourth largest economy could yet play into the looming crisis.

The background to all this unease is a sluggish European economy that stubbornly refuses to grow, and is threatening to emulate Japan's long-running stagnation.

The ECB has thrown everything, including the kitchen sink, at the problem and has nothing left to chuck.

Negative interest rates already cause more than raised eyebrows in Germany.

It has led to the head of the bank, Mario Draghi, musing about "helicopter money" - a sort of post-Keynesian stimulus, achieved not by investing in big public projects, but by simply giving people money to spend.

Such a reward for profligacy, as some Germans see it, produces howls of anguish, with the finance minister blaming the central banker for the rise of the hard right.

With the mood as it is, few are proposing a new EU treaty to further fiscal and monetary integration. The logic is impeccable, but it is a solution that is in stark contrast to an apparent public desire for less, not more Europe.

Policy makers see it as an inevitable step - they just can't say when it would be practical.

Migration crisis

So the stage could be set for another crisis - perhaps around the time we Britons go to the polls in the EU referendum.

But the EU has a habit of muddling through each crisis. It is never elegant, never the complete answer, but survival is the ultimate virtue.

Forecasts of doom and disaster tend to go awry in the EU, simply because in the end the political will does exist to seek solutions - sometimes at a great cost.

Image copyright Getty Images
Image caption The flow of migrants into Europe has also put pressure on the European project

There is a primacy of politics over economics which the market continues to buck.

Look at another great crisis: migration.

It seemed that the German-brokered deal between Turkey and the EU would not be backed by the other countries. It was.

It seemed the practical barriers to it working were insurmountable. But the flow of migrants from Turkey to Greece has slowed and the numbers coming into Germany and through the rest of Europe, have become a trickle.

It is an indication that while the EU may not be very good at scoring goals, it does find a way to keep the ball in the air.

What would bring it crashing down would be if the political tensions between north and south grew so great that the players lost the will to fight gravity.