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Nov 8, 2012 | 20:18 GMT

4 mins read

Update on the Eurozone Crisis

Video Transcript:

On Nov. 7, the Greek Parliament approved a new package of austerity measures. The 13.5 billion euro ($17.1 billion) package was voted on the second day of a nationwide general strike against the government's economic policies.

This package will bring Greece closer to receiving the next tranche of financial aid from the European Union and the International Monetary Fund. However, also on Nov. 7, the European Union reduced its growth forecast for the eurozone, and the European Central Bank renewed its promises of intervention in the bond markets. These events reveal that the European Union is far from solving its structural problems.

First, the European Commission announced that its original forecast of 1 percent gross domestic product growth for the eurozone in 2013 was reduced to just 0.1 percent growth. Countries under high market pressure such as Spain and Italy are projected to keep contracting next year, and growth is not expected until 2014. These countries are also likely to fail to meet their budget deficit goals for next year.

In this context, European Central Bank President Mario Draghi stated that the ECB is ready to purchase bonds from countries under market pressure. The goal of Draghi's statements is to bring some calm to the markets at a time where the European periphery seems unlikely to grow its way out of the crisis.

So far, Draghi's strategy has worked. His September announcement of a bond-purchasing program by the European Central Bank has somewhat reduced the borrowing costs of the European periphery. This has in turn delayed Spain's decision to formally ask for a sovereign bailout. As long as Madrid considers that its borrowing costs are tolerable, the Spanish government will not request a bailout.

But the strategies that have worked in 2012 may not be enough in 2013. The promise of ECB intervention has bought Spain some time, but it has not solved any of Spain's long-term problems. One in four Spaniards is unemployed, the Spanish economy is in recession and most of the Spanish autonomous regions will need financial assistance from the central government next year. This means that Madrid will still be at the center of the European crisis next year, even if the ECB statements help Spain survive in the short term.

Two key eurozone countries, Italy and Germany, will hold elections in 2013. In Italy, general elections are scheduled for April. Brussels and the international markets fear that the next Italian government could backtrack on some of the measures that were adopted by the technocratic government of Italian Prime Minister Mario Monti such as pensions or labor reform.

The current fragmentation of Italian political parties could lead to a fragile coalition government. This could create political instability and put Italy back in the danger zone, as Rome's borrowing costs could rise as a consequence of its political situation.

Germany will hold elections in September. German Chancellor Angela Merkel is relatively comfortable with the situation. The country has made several concessions to the eurozone periphery this year, but German voters still consider that the chancellor is protecting Germany's interests.

As long as the peripheral countries remain afloat and the German parliament is not asked to vote for more bailouts, the instability in Italy or Spain will not substantially jeopardize Merkel's political future. Merkel's political options will be more linked to the future of the German economy, as the export-driven system is beginning to slow down.

However, the status quo is not sustainable in the long term, and it will take more than press statements by the European Central Bank to address the eurozone's structural problems. The European Union managed to contain the crisis this year. But the tools that worked in 2012 may not work in 2013.


Update on the Eurozone Crisis
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