The markets’ bullish mood have kept a lid on eurozone government bond yields, but the reasons to be concerned have kept piling up in the background. Credit-ratings agency Standard & Poor’s downgraded several eurozone nations.
Meanwhile, Greece resumed talks with its creditors in order to secure a deal avoiding default, which would be the first by a developed country in almost 60 years. And to top it all off, the World Bank warned emerging markets to plan for an economic meltdown should the euro crisis intensify.
What the commentators said
While all eyes are on Greece, Germany is becoming a worry. Europe desperately needs growth to allay fears that it won’t be able to get to grips with its public debt. Unfortunately, “Germany, its power plant, can’t even propel itself”, said Ian Campbell on Breakingviews. Momentum is clearly dwindling. Growth for 2011 came in at 3% but the economy probably shrank in the last quarter, according to the statistics office.
The trouble is that it relies on exports, which account for around half of GDP. When foreigners are buying, it has a knock-on effect at home, where local companies invest in new plant. “But now that consumers in the eurozone, eastern Europe and around the world aren’t buying so readily, Germany stalls.” Consumption has risen, but remains underpowered as households “in [an] ageing population prefer to save”.
Germany’s descent into recession will dent confidence in the “notion that the Teutonic superman could always be counted on to fund every bail-out fund and rescue every insolvent state”, said The Wall Street Journal. And it is likely to make Germany even more reluctant to help the periphery.
At the same time, however, attitudes in the debt-stricken south are hardening. Italy’s prime minister Mario Monti has called on the core states to do more to bring peripheral interest rates down, to avoid a “powerful backlash” against deep austerity. In Italy’s parliament “the degree of impatience-cum-hostility to the EU, to Germany and to the ECB is mounting”, he said.
There were also yet more street protests in Greece recently. As the growth outlook deteriorates, the odds of deepening political conflict and a southern state pulling the plug on austerity, thus setting off a chain of defaults and a collapse of the euro, are rising.