The European Union’s Nobel peace prize comes just as a realization is dawning that Europe’s single currency – the EU’s most ambitious project – has survived three years of incessant financial turmoil and is not going to break up.
But having narrowly avoided an acrimonious divorce and the loss of some of its errant children, the eurozone risks a future as an unequal, loveless marriage with frequent rows and the prospect of separate bedrooms.
Two things have become clearer in the last few weeks that were widely disputed before: contrary to prevailing opinion earlier this year, the euro is here to stay and could very probably keep all 17 members and add more in future.
But the eurozone has not yet found a way out of the doldrums of economic stagnation, unemployment and social dislocation that are widening the gap between northern and southern Europe and fuelling Eurosceptical populist movements in many countries.
Three events have changed the outlook for the euro area:
– The European Central Bank put a floor under the eurozone by agreeing last month to buy unlimited quantities of bonds of any troubled member state that accepts the conditions of a bailout program. ECB President Mario Draghi made clear the bank will use all its tools to defeat anyone betting on a break-up of the monetary union.
– The eurozone’s permanent rescue fund came into effect last week after months of wrangling and legal challenges, providing a 500 billion euro backstop for countries that risk losing access to capital markets.
– And German Chancellor Angela Merkel signaled by visiting Athens that the EU’s most powerful economy wants Greece to stay in the euro area, drawing a line under months of debate in Berlin, notably in her own coalition, about ejecting the Greeks.
Coincidentally, a flood of scenarios for the explosion and break-up of the euro that spewed out of the banks and political risk consultancies of London and New York for months has suddenly dried up.
In currency markets, short bets against the euro have subsided. Bond yields have fallen and bank shares have recovered. Spanish banks are having to borrow less from the ECB as some regain access to the money markets.
In another micro-indicator of a changed climate, economists at U.S. bank Citigroup have revised their view that Greece will almost certainly leave the euro, saying key euro zone players seem to have decided a Greek exit would do more harm than good.
The U.S. bank lowered the probability of a «Grexit» to 60 percent from 90 percent, although it still believes Greece is more likely than not to leave the euro within 12-18 months, arguing that European governments are unlikely to agree to waive part of the country’s huge debt to make it sustainable.
Don’t write off a write-off, though, especially if it can be delayed until after next year’s German general election. It may then seem a more rational, albeit unpopular, option than a disorderly Greek default and exit, with all the disastrous economic and social consequences for Greece and Europe.
One voice last week jarred with the easing of European existential anxiety: the International Monetary Fund said the EU’s policy response remained «critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears and economic decline».
In its role as an uncomfortable truth-teller, the IMF is trying to jolt the eurozone, especially Germany, into moving ahead faster with a banking union and closer fiscal integration, and altering the policy mix between austerity and growth.
In a candid acknowledgement, the IMF admitted it had underestimated the damage to growth wrought by budget cutting and urged Europe to ease up on austerity, drawing an indignant rebuff from Germany’s finance minister.
The shift in perceptions about the eurozone is more noticeable in the financial markets than on the streets, where the impact of the sovereign debt crisis will continue to cause ravages for years to come.
Public spending cuts and recession are tearing at the fabric of societies from Athens to Madrid, casting many middle class families and retirees into poverty and more unemployed and young people into precarity.
The crisis has changed the balance of power in Europe, giving Germany and its north European allies a preponderant say in euro zone decision-making commensurate with their credit rating, while making southern states weaker and more dependent.
A two-speed Europe, in which everyone was heading in the same direction at different paces, may now be turning into a two-tier Europe, with the euro zone becoming a tighter inner core with its own budget and stricter rules, while Britain, Sweden and some others form a looser outer circle.
Germany, determined to limit its taxpayers’ liabilities for other euro states, has rejected issuing common euro zone bonds or providing a joint bank deposit guarantee.
The German, Dutch and Finnish finance ministers are trying to rule out any retroactive use of eurozone rescue funds.
Yet Berlin supports the emerging idea of creating a separate eurozone budget to cope with asymmetric economic shocks, and its backing for a single banking supervisor will surely open the door to some greater mutualization of risk in the longer term.
As the euro area becomes a more integrated federal bloc, EU members outside the single currency face awkward choices.
Those such as Poland, Hungary and Latvia that aspire to join the monetary union as soon as possible are trying to hug the eurozone as tightly as possible, demanding seats and votes in a new banking supervisory authority that take decisions on banks operating on their soil.
Poland tried unsuccessfully last week to lever its way into the inner sanctum of eurozone finance ministers by offering to join a group of EU states launching a financial transaction tax in return for a seat at the Eurogroup table.
It was told only euro members could attend the Eurogroup.
Britain, which has no intention of joining either the euro or the banking union, is demanding a veto right to protect its large financial sector from decisions taken by the others, while aiming to use closer eurozone integration as an opportunity to negotiate a loosening of its own European ties.
Sweden, with a pro-euro political establishment that lost a referendum on joining the currency in 2003, seems more uneasy and conflicted about the euro zone moving ahead without it.
All of this means Europe faces a tense period of reshaping that will severely test its Nobel-recognized powers of building peace and prosperity on a fractious continent.