EUROPE´S "RECOVERY" IS CONJURING TRICK / THE TELEGRAPH

Europe’s 'recovery’ is a conjuring trick

The eurozone has had a good year – on paper. But it is crippled by too much debt to survive intact, says Jeff Randall

By Jeff Randall

8:15PM BST 28 Jul 2013
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Photo: EPA

This week, British people engage with their European neighbours in greater numbers than at any other time of the year. With the school holidays underway, they charge off to France, Spain, Greece and Portugal in search of better weather, cheaper drink and the je ne sais quoi of continental living.

For most, soaking up the sun and gulping down Sancerre, much will seem the same as last summer. Behind the scenes, however, financial markets in the Club Med countries are very different compared with 12 months ago, when the eurozone’s straitjacket appeared to be splitting.
 

Share prices in particular have enjoyed a remarkable resurgence. Stock market indices in Portugal, France and Spain are up by about 30 per cent. That’s pretty impressive for economies running on empty but is completely outshone by Greece, where the main index is now 64 per cent higher than in June 2012. If that sounds too good to be true, remember that at its current level of 294, the Athex 20 is still 85 per cent lower than its high point of 2008.

None the less, there’s a temptation to look at the direction of travel and conclude that, even for the eurozone’s weaklings, the point of maximum danger is history. This is what EU leaders and the European Central Bank would like us to believe, because it fits their broader narrative: the single currency works, is sustainable and benefits all in the long run.
 

At the core of this “recovery” is a bluff that has yet to be called. In August last year, the European Central Bank’s president, Mario Draghi, promised to do “whatever it takes” to defend the euro through the unlimited purchase of bonds issued by troubled EU states. It was high-quality legerdemain. Presented with the perceived safety net of a one-way bet, private investors returned to buying sovereign debt and company shares in the EU’s angst-ridden periphery.
 

Not since the Wizard of Oz has an illusionist created so much fuss with so little substance. Without spending a single cent, Draghi conjured up a fall in borrowing costs and a rise in stock markets.

What’s more, consumer confidence improved in the EU’s more solvent regions, albeit from a woefully low base. The killer question now is: how long can the magician keep the trick going? Or, as Toto did in the movie with Judy Garland, will the curtain be pulled back to reveal nothing more tan bluster behind a screen of smoke and noise?
 

The answer will not be known until after September 22, when the Germans go to the polls. Angela Merkel has played a blinder in simultaneously helping to shore up the eurozone’s balance sheet while persuading domestic supporters that Germany’s chequebook is now closed to those seeking credit extensions on easier terms. If, as seems likely, the German chancellor is re-elected, she will return to a series of horror shows that have been masked but not mastered. There are too many fundamental flaws inside the eurozone for crisis deferral to be a permanent policy.

Debt, far too much of it, is still the cancer in the system. In Portugal, it is heading for 130 per cent of national output.

Voters there are dizzy with austerity fatigue. The government in Lisbon staggers along with barely a mandate, trying desperately to keep the country’s 78 billion euro bail-out programme on track. Next door in Spain, the national mood, already grim, darkened further last week after the train disaster in Galicia.

Unemployment fell from 27 per cent to 26 per cent, but only thanks to temporary tourism jobs. Come September, many of them will vanish.

In Greece, where universal taxes remain an abstract concept, George Papaconstantinou, the country’s former finance minister (2009-11), is to be put on trial for abuse of office. He was part of a team that negotiated a 110 billion euro bailout from the EU and International Monetary Fund in 2010. That vast sum already looks far too little. Greece’s financial position is terminal. It cannot hope to save, invest and grow its way out of trouble while repaying all its creditors in full. The numbers don’t add up.

Greece needs a wholesale restructuring of national debt, including a haircut for its sovereign lenders — that means Germany, which is stuffed with Greek IOUs. Hitherto, German taxpayers have reluctantly granted loans and guarantees, but they have been told to expect all their money back. That is not going to happen.

Mrs Merkel has two options: allow Greece to collapse or admit that, if the eurozone is not to disintegrate, Germany’s next growth sector will be charitable donations. But where does Berlin draw the line? When you set up a soup kitchen, there is no way of knowing how long the queues will be.

Italy’s debt, like Portugal’s, is about 130 per cent of GDP; its credit rating was downgraded this month and the economy continues to shrink, prompting fears that several Italian banks are heading for zombie status.

Finally, there is France, capital of euro-delusion. President Hollande recently declared, “recovery is there”. With unemployment at 11 per cent and a looming pensions deficit of 20 billion euros, it needs to be. The gods, however, have not been kind.

Last week, freak hailstorms smashed through Burgundy, destroying some of its best-known vineyards and at least four million bottles of decent wine. How long before the eurozone’s financial markets suffer something similar, as disbelief returns from its 12-month suspension?



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