Politics Threatening Euro Area Endurance

Written by | Monday, June 9th, 2014

After euro area bond market got back to normal and economic growth returned to a steady, though uneven, trajectory, European politics is believed to pose the biggest obstacle to the long-term sustainability and endurance of the euro. Extensive anti-Brussels demonstrations connected to May European Parliament polls are likely to make it more difficult for the EU Member States governments to carry on with austerity measures and structural economic reforms while trying to further integrate the single currency area. The public’s opposition in Germany, the EU’s biggest economy, may hinder further monetary easing measures that the Frankfurt-based European Central Bank (ECB) started last week. The ECB planned to introduce more US-like monetary policies such as radical asset purchases if the threat of deflation persists. Berlin has in the meantime turned down the plan to use its own fiscal strength to invest more in infrastructure or to boost domestic demand via lax taxation.
The EU leadership and the ECB have made a lot of effort to reinstate confidence and trust in the European market by providing the euro area with a financial rescue fund, austerity policies, and a single banking supervisory body and a de facto lender of last resort. Yet, the current political will to finalize the economic and monetary union looks more and more vulnerable especially if it needs winning public approval for changes to the EU’s underlying treaties. According to a French economist, Jean Pisani-Ferry, fighting the euro crisis has already proved to be of a critical importance domestically, yet many critics of the EU have softened their pre-crisis opinions. Even opponents who predicted that the euro zone could fall apart as a result of the crisis, like US economist Nouriel Roubini, admit that many things have improved in the euro zone in the last two years. Countries that were under heavy bail-out, except for Cyprus and Greece, have already issued their first five-year bonds. Yet, the focus is now moving to France and Italy – Europe’s second and third largest economies – which have not implemented so many reforms and therefore are under threat. Moreover, the situation is being complicated by the rise of radical and far-right parties, which are believed to be among the main obstacles to further improvements and developments.

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