It was almost exactly five years ago that the euro crisis erupted, starting in Greece. Investors who had complacently let all eurozone countries borrow at uniformly low levels abruptly woke up to the riskiness of an incompetent government borrowing money in a currency that it could not depreciate. There is thus a dismal symmetry in seeing the euro crisis flare up again in the place where it began.
The proximate cause of the latest outbreak of nerves was the decision by the Greek government, now headed by the generally competent Antonis Samaras, to advance the presidential election to later this month. The presidency is largely ceremonial, but if Samaras cannot win enough votes in parliament for his candidate, Stavros Dimas, a general election will follow. Polls suggest the winner would be Syriza, a populist party led by Alexis Tsipras. Although Tsipras professes that he does not want to leave the euro, he is making promises to voters on public spending and taxes that may make it hard for Greece to stay. Hence the markets' sudden pessimism.
As it happens, there is a good chance that Dimas, a former E.U. commissioner, will win the presidential vote at the end of this month. But the latest Aegean tragicomedy is a timely reminder both of how unreformed the eurozone still is and of the dangers lurking in its politics.
Ever since the pledge by the European Central Bank's president, Mario Draghi, in July 2012 to "do whatever it takes" to save the euro, fears that the single currency might break up have dissipated. Much has been done to repair the euro's architecture, ranging from the establishment of a bailout fund to the start of a banking union. And economic growth across the eurozone is slowly returning, however anemically, even to Greece and other bailed-out countries.
Even if the immediate threat of breakup has receded, the longer-term threat to the single currency has, if anything, increased. The eurozone seems to be trapped in a cycle of slow growth, high unemployment and dangerously low inflation. Draghi would like to respond to this with full-blown quantitative easing, but he is running into fierce opposition from German and other like-minded ECB council members. Fiscal expansion is similarly blocked by Germany's unyielding insistence on strict budgetary discipline. And forcing structural reforms through the two sickliest core euro countries, Italy and France, remains an agonizingly slow business.
Japan is reckoned to have had two "lost decades," but in the past 20 years it grew by almost 0.9 percent a year. The eurozone, whose economy has not grown since the crisis, is showing no sign of dragging itself out of its slump. And Japan's political setup is far more manageable than Europe's. It is a single political entity with a cohesive society; the eurozone consists of 18 separate countries and their political landscapes.
Greece is hardly alone in having angry voters. Portugal and Spain both have elections next year, in which parties that are fiercely against excessive austerity are likely to do well. In Italy, three of the four biggest parties, Forza Italia, the Northern League and Beppe Grillo's Five Star movement, are turning against euro membership. France's anti-European National Front continues to climb in the opinion polls. Even Germany has a rising populist party that is against the euro.
Indeed, the political risks to the euro may be greater now than they were at the height of the euro crisis in 2011-12. What was striking then was that large majorities of ordinary voters preferred to stick with the single currency despite the austerity imposed by the conditions of their bailouts, because they feared that any alternative would be even more painful. Now that the economies of Europe seem a little more stable, the risks of walking away from the single currency may also seem smaller.
Alexis de Tocqueville once observed that the most dangerous moment for a bad government was when it began to reform. Unless it can find a way to boost growth soon, the eurozone could yet bear out his dictum.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
