The Eurozone Crisis Is Almost Over. Or Is It…?

Eurozone leaders believe that the debt crisis that has plagued their countries since the start of 2010 is now coming to an end. I disagree, here’s why…

The Bulls

Speaking in Tokyo yesterday Italian Prime Minister Mario Monti said that “The Eurozone has gone through a huge crisis, but I believe that this crisis is now almost over.”

His bullish words were echoed by German Chancellor Angela Merkel who said that the crisis is ebbing and her country’s borrowing costs will probably rise as its status as a safe haven wanes.

The Bears

Clearly it is in their interest to be optimistic about their country’s prospects, but giving the impression that we are out of the woods is misleading at best.

In January the IMF published a revised forecast predicting that the 17 economies of the Eurozone would contract by 0.5% during 2012.

Just last month the European Commission slashed its economic forecast for 2012 from growth of 0.5% to a 0.3% contraction.

This leaves just the OECD (Organization for Economic Co-operation and Development) forecasting positive growth for the region. In a statement issued yesterday the organisation reiterated its November projection of 0.2% growth this year. However an OECD official said that this forecast is likely to be downgraded.

The OECD is calling for “ambitious economic reforms” within the Eurozone. Speaking at a meeting in Brussels yesterday, Angel Gurria, the secretary general of the OECD, said that the Eurozone bailout fund should be increased to 1 trillion Euros. “When dealing with markets you must overshoot expectations” Gurria told a joint press conference. “The mother of all firewalls should be in place, strong enough, broad enough, deep enough, tall enough, just big,” he said.

Mr Gurria said an impressive firewall was crucial because the Eurozone’s public debt crisis was not over despite calmer financial markets this year. He warned that the bloc’s banks remain weak, debt levels are still rising and fiscal targets are far from assured.

With economic growth contracting and unemployment rising, nations across the Eurozone face the twin problems of lower tax revenues and higher welfare payouts. This is putting their public finances under increasing strain. Ireland’s government for example currently relies on a €67.5 billion EU-IMF credit line which is due to run out in 2013.

The pursuit of harsh austerity measures without the much needed economic and monetary reforms will lead to what George Soros calls a “deflationary debt spiral”.

At the World Economic Forum’s annual meeting in Davos in January, the billionaire investor stated that “Without a clear game plan, Europe will remain mired in a larger vicious circle, in which economic decline and political deterioration continue to reinforce one another.”

For the most part, both investors and the man in the street have been temporarily mollified, but as I’ve argued before, we are simply in the eye of the storm and we’ve got at most 2-3 years before the wheels come off in spectacular fashion.

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