29th November 2010
The Eurozone has finally signed off its €85bn bailout package for Ireland. The confirmation was initially welcomed by markets, but jitters speedily returned about the sustainability of the Eurozone in the face of this latest hit to its wallet. The question now being asked is whether the Eurozone can afford to keep bailing out its members.
This piece on Citywire outlines the key points from the bailout, noting that the European Council has agreed to set up a new permanent mechanism to deal with governments that get into financial trouble.
This is all encouraging. In spite of this the problem, in the main, is fear. The bond markets have been nervous, pushing up the cost of debt for peripheral European countries such as Portugal, Greece and – the real source of all this worry – Spain. There is a danger that this fear pushes these countries into a bailout that the Eurozone may or may not be able to afford.
The high profile Goldman Sachs economist Jim O'Neill has some thoughts on the sustainability of the Eurozone, outlined here in Robert Peston's blog.
O'Neill says that while the rebuilding of the Eurozone will be imperfect, it is likely to hold. Although the sovereign indebtedness of Greece, Ireland and Portugal is huge relative to their individual economies, it is tiny compared to the overall size of the Eurozone. Spain is the biggest worry for most market participants and its debt still ‘only' represents 5.3% of Eurozone GDP. Eurozone debt as a whole is similar to that of the US.
The trouble is that the Eurozone is not the US, as Dannecus points out in response to Peston's blog: "It does not really operate cohesively. Elections are mainly a joke and 'anyone' can get elected to the EU parliament with little or no scrutiny of their lack of talent. Either (the Eurozone) should become a country (a federation like the US) and impose proper management on its wayward outlying regions, or give up and go back to being separate countries….The main problem with the Euro is a total lack of decent management skill at the centre of the monster, despite the huge sums it costs. Until they fix this it is going to continue to be a mess."
Imposing an austerity package in the US is easier, because it is centrally managed (even though it has shown little sign of doing so to date). The Eurozone, in contrast, has too many moving parts.
However, the bail-out continues to show how committed the member states are to the maintenance of the Eurozone. It also shows where the balance of power lies. Ireland has been forced to recognise that its participation in the Euro, from which it has derived such benefits, comes at a price – sublimation to the will of Germany.
There may be another lesson to learn. As one anonymous commenter on Citywire points out, "if this crisis teaches governments and Bank's anything, it is to not be so beholden to the bond markets. On the whole bond holders are extremely risk adverse and it doesn't take much to turn a little bit of bad sentiment into a self-fulfilling crisis of confidence."
The Eurozone crisis is unlikely to have run its course. The imbalances created by the structure of the Eurozone are likely to reappear periodically. The fragility of the Eurozone is not as severe as many have been suggesting, but its future is not assured.
SEE ALSO: Ireland forced into bailout (video)