Ever since the euro crisis erupted in 2010, there has been a sharp summer sell-off in stocks and bonds. This year markets have been quieter – but the next scare may not be far away. This week, snap elections in Portugal were avoided when the president threw his weight behind the ruling coalition, easing fears that growing austerity fatigue across the political spectrum could derail Portugal’s bail-out. But, says Rabobank International, splits within the coalition could resurface when the 2014 budget bill is due in September.
“Default in some form looks unavoidable” for Portugal, says Colm McCarthy in the Irish Independent. The deficit is still 6.4% of GDP and austerity has reinforced the fall in output, making the debt problem worse. Greece will also need to have its debts restructured. The economy is expected to shrink by another 5% this year and without internationally competitive manufacturing or services there is no “engine of recovery”. Even worse, unless Spain and Italy can “find… some formula for a return to growth, their debt… could prove unsustainable”.
So, a debt default and potentially messy euro exit by a peripheral state remains a threat. It hardly helps that, with the northern creditor countries likely to be called upon to provide more help and the southern states stuck in recession, political tension in the eurozone is set to ratchet up a few notches. With Germany only nine weeks away from an election, none of these issues is being addressed. But they can’t be swept under the carpet forever.