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The Eurozone – déjà vu all over again

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Will 2015 be the year Europe puts its problems behind it?

The snap Greek general elections to be held on 25 January, which look set to deliver the radical-left Syriza party into power, will have wide repercussions on the rest of the Eurozone and will be a major talking point for anyone with an interest in economics and politics for the foreseeable future.

Syriza, already the second largest party in the Greek parliament, has long stood for a renegotiation or rejection of the country’s €240 billion (£188 billion) bailout. If elected, it will likely default on its debt payments, or force bondholders to accept a fraction of what they are owed.

In a worst-case scenario, Greece could leave or be forced out of the Euro, with potentially grave results for the Greek economy.

The success of Syriza would also likely embolden Spain’s equally truculent far-left party, Podemos, and with Spanish general elections also to be held in 2015, this political uncertainty risks reigniting the Eurozone debt crisis that rumbled on throughout 2010-12.

While predicting the future is at best a mug’s game, the fall-out of the Greek elections will cause financial ripples far wider than Athens, although it’s too early to tell what the effect of this might be on pension funds and other investments here in the UK.

But it didn’t have to be this way…

Throughout the financial crisis, European leaders – including the European Central Bank (ECB) – have consistently been on the back foot, failing to address the underlying economic problems facing the continent and refusing to take bold steps to deal with the problem once and for all. Instead, they have looked to treat symptoms on a case-by-case basis, or were reacting too late to problems already in the past.

For example, there were opportunities back in 2010-11 to deal with the debt crisis by pooling and issuing Euro-denominated government debt from a single pot. Countries like Greece, Spain and Italy would have seen their high borrowing costs fall, while more affluent nations – particularly Germany – would have faced slightly higher interest rates on their bonds.

Another, potentially less controversial option would have been to engage in Quantitative Easing (QE) – a kind of have-your-cake-and-eat-it way of printing money without printing money – which the US, UK and Japanese governments have tried, with varying degrees of success.

Nein, danke…

Instead – thanks to stiff German opposition to both ideas – Europe launched a series of alphabet-spaghetti bailout funds with names like the European Financial Stability Fund and the Long Term Refinancing Operation, to force down peripheral nations’ borrowing costs through cheap credit, culminating in the ECB’s steadfast commitment to save the Euro ‘at whatever cost’ via virtually unlimited bond purchases.

Instead of spurring the kinds of deep structural reforms needed to put the Eurozone economy back on track, these actions allowed countries to kick issues down the road.

France and Italy in particular used the ECB’s absolute support of the Euro as an excuse to avoid taking hard decisions around employment policy. It is too hard for French and Italian companies to hire and fire staff or reach wage compromises in response to the economic climate, which has choked off growth.

And while the French and Italians now seem to realise this, and are trying to push through much-needed reforms against stiff opposition, it may be too little too late. The Eurozone bloc as a whole recorded growth of just 0.2% in the third quarter of 2014, while the falling oil price helped tip it over the edge into deflationary territory. Prices fell by 0.2% in December and should deflation continue, it is likely to cause further economic damage.

So finally, after months of flirting with the idea – and more than five years after both the US and UK implemented it – the ECB now looks almost certain to start a QE programme of its own, despite fears that it may prove too little too late.

The ECB is, once again, playing catch-up with policy. For the good of the Eurozone – and the wider global economy – it must be hoped that for once, it can get ahead of the issues.

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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