Political will too small for break up
The one clear outcome of the recent votes in Greece, Ireland and France was that there was little political will to break up the eurozone. This seems to be true at the periphery as much as at the core and among the broader electorate as much as among party-political and bureaucratic elites.
The votes were by no means quiescent. Political transformation has rolled out in the wake of the eurozone crisis since the early part of 2011, when the then Irish government was swept away, and that theme continued. In Greece, the hardline ‘no’ party, Syriza, was rejected by the electorate, but not before deep change across the political landscape. In France, François Hollande came in with a fresh approach and new ideas, hoping to balance austerity with growth. But in all the debate and all the rhetoric, there has been very little – if any – absolute opposition to the euro as such. Syriza’s key aim was to reform the bailout agreement not to opt out of the single currency. Mr Hollande is little less than a devout europhile.
The message, in my view, is that the eurozone stays, but with changes. Leaving aside the complex issues of treaties, compacts and the like – what does that message tell us about the immediate scene in continental Europe?
Part of the answer is that measures needed to sustain the single currency are likely to be implemented. In particular, we should expect real commitment at a European level to ensure that Spain – the current focus of the bond markets – remains a fully fledged member of the eurozone. This means that 10-year bond yields of over 6.5 per cent are not likely to remain, when 5 per cent is more like the maximum sustainable rate needed to ensure continued membership. The authorities are therefore likely to engineer a solution to ensure this happens. The underlying Spanish economy is in better shape than the newsflow tends to suggest. Headline unemployment is always high in Spain, mainly due to the substantial grey economy. It is hard to measure, for obvious reasons, but the true unemployment figure is unlikely to be the 20 per cent currently reported. Youth joblessness in Spain is distorted by the peculiarity that it is the only country in Europe to include people at university as unemployed.
Recent economic data, while poor, is not as bad as expected. Recent readings of business confidence surveys in the service sector have been above expectations. Electricity consumption (a gauge of economic activity) was only down 1.2 per cent in the second quarter, while June unemployment fell by the largest amount in years. Spanish regions and municipalities have been paying their bills to suppliers for the first time in months, injecting some €30bn back into the economy at the end of June. This could potentially provide a strong boost into the summer as many of these are small businesses which will keep the money in circulation.