The eurosceptic case against the single currency has suffered two sizeable blows in the past week.
First was the European Central Bank’s (ECB) decision last week to buy up unlimited amounts of bonds to bring down struggling euro members’ borrowing costs. Then, earlier today, came the Bundesverfassungsgericht (German Constitutional Court) decision to approve the legality of the new euro bail-out fund, the ESM.
Moreover, the president of the European Commission, Jose Manuel Barroso has also, in his state of union address, laid out plans for the creation of a banking union – something some see as a precursor to a deeper fiscal union.
The combined effect of all of this has been that not merely are people no longer countenancing an immediate euro break-up – some believe this might well go down as the turning point in the crisis, the moment Europe really started to sort itself out.
And it is certainly the case that the mood has shifted in the past few months. Earlier this summer, senior policymakers in the debate were telling me privately that Greece was dispensable; that they could let the country leave the euro without too much trouble. Now, it seems they’ve returned from their summer holidays with an altogether different attitude – to keep the country within the single currency at all costs.
This seems to me to be an eminently sensible attitude: my hunch has always been that if politicians allowed Greece to leave, there would be a significant chance of a sudden and uncontrollable exodus of cash from Portugal, Spain, Ireland and the rest. So have things on the Continent really changed for good? The short answer is no.
The most optimistic conclusion is that Europe has been dosed with a rather powerful anaesthetic, but the hard work of actually uniting and saving the currency has yet to be done. It is also rather likely that the feel-good factor currently reigning in Brussels will last little longer than a few months – if that.
In part this is down to the fact that there is rather a lot of small print attached to both of those recent seminal decisions: the ECB’s new OMT scheme will not work unless Spain and Italy sign up to conditions they may well balk at. The German court ruling has only approved the creation of the ESM provided there is a cap on its size; and some suspect it is already too small.
But to my mind the main reason to be sceptical about the progress made thus far is more simple: so far, no money has changed hands. Despite the fact that its promise has brought down governments’ borrowing costs, the ECB has yet to buy any of the relevant bonds. The ESM has yet to fork out a sizeable amount to a troubled country (most of the previous bailout money came from the previous rescue fund, the EFSF). The banking union plans omit the most important instrument in creating a single financial state: a deposit insurance scheme funded by each euro member.
If there is one rule of thumb worth remembering each step along the way in the euro crisis, it is that problems generally tend to happen in one of two situations: 1. when a country actually has to hand over money and 2. when there’s an election or a politician is turfed out of office.
None of what’s happened recently involves either of the two above scenarios (save for the Dutch election today, which looks likely to be won by euro-friendly centrists). Nor will it cost all that much if the Troika decides (as I suspect it will) to give Greece more time to meet its austerity targets.
However, the only way the euro crisis will be fully resolved is for the North of the continent to transfer cash to the South – either fiscally or monetarily (eg through higher German inflation). ECB president Mario Draghi and his colleagues have very cleverly disguised this eternal truth in their new schemes.
But at some point, events will remind them of it. Moreover, there are a couple of big elections coming up: the US Presidential elections in November and the German Chancellor elections next year.
Barack Obama was putting immense pressure on the Europeans to try to dampen down the crisis earlier this summer so the threat of European economic disaster wouldn’t impinge on his re-election chances. Mr Draghi et al look successfully to have managed that. But can they really quieten things down all the way through until the German elections?
With the continent still stuck in recession (indeed, with Germany likely to face recession by the end of the year), it seems more than a little optimistic. The euro’s fundamental problems – massive internal imbalances, overspending in the South, over-saving in the North – remain unresolved.
The crisis is not over, but it may well be hibernating.
This article is also available on the Sky News website.