Macroscope | Europe’s financial position is still perilous years after the debt crisis

Global markets seem to have sunk into a collective amnesia over problems which have dogged the euro and European financial stability for years. The single currency might have plateaued out around the US$1.20 mark versus the US dollar, but the euro’s failure to make stronger gains out of the dollar’s recent troubles reveal underlying relative weakness. The euro’s inability to win over investors in a bigger way will come back to haunt it. 

Europe’s economy seems to have recovered from the dark days of the 2008 global downturn and Europe’s debt default crisis, which took the euro and European monetary union to the brink of collapse. But this has been possible only through massive intervention from the European Central Bank, riding to the rescue with negative interest rates and the bank’s €2.5 trillion (US$3 trillion) asset purchase programme. Whether the euro zone can stand on its own two feet once the ECB’s special measures end is still open to doubt. 

European central bankers have successfully papered over the cracks while financial markets have suffered a massive memory lapse. Germany’s recovery might seem copper-bottomed but there are still too many zombie economies in the euro zone living off the ECB’s monetary steroids. Debt deflation and fiscal austerity still rip great holes in aggregate demand, with euro zone inflation serially undershooting targets while unemployment remains far too high. 

Germany is lucky to run a public-sector surplus, but high-debtor countries like Italy and Greece will be stuck with agonising debt burdens in perpetuity without major structural overhaul.