Today, as we wake up to the European election results it is opportune to reflect on the state of the Eurozone.
Cast your mind back just over a year to March 2013. The Eurozone was going through its fifth bailout, with Cyprus on the brink of meltdown. There was a fear that a major country, like Italy or Spain, might follow, exhausting the Eurozone bailout capacity. A test looked imminent for that famous 2012 pledge made by the European Central Bank’s (ECB) chairman, Mario Draghi, that the Bank would do “whatever it takes” to save the euro.
Fifteen months on and the word Eurozone is no longer automatically twinned with the word ‘crisis’:
• Ireland officially left its bailout programme at the end of 2013, after three years of treatment.
• Greece, which had two bailouts, was able to able to raise €3bn of five year government debt in April at a cost of only 4.95%. The bond issue was eight times oversubscribed, despite Greece having a B- ‘junk’ credit rating.
• Portugal followed Greece by raising €750m of 10 year bonds at a rate of just under 3.6% later in April. It was the government’s first bond auction in three years and comes ahead of a likely exit from its bailout programme.
• Spain, which did not have a formal bailout, but did receive EU funds to support its banks, is also finding favour in the markets. Its 10 year government bonds are now yielding about 3%, against over 7.5% in 2012.
Does all this mean that the Eurozone is on the road to recovery? The answer is, perhaps inevitably, yes and no. The ‘periphery’ countries are no longer the concern that they were, but serious economic issues remain. Greece still has a mountain of debt that experts expect will require another write down at some point. Spain continues to have an unemployment rate of over 25%, with a youth unemployment of double that level.
Ironically, worries are now moving from the periphery to the core, and in particular France. The Eurozone’s second largest economy is struggling to meet its 3% EU government borrowing target – already twice deferred – has 10%+ unemployment, almost no economic growth and a deeply unpopular President.
In the Eurozone background is the spectre of deflation (falling prices). Inflation in the zone is now 0.5%, a long way below the ECB’s target of slightly under 2%. Mr Draghi could yet end up doing “whatever it takes”…
With the success of eurosceptic parties throughout Europe, we live in interesting times.