If it came from Nigel Farage no one would be very surprised. Or from one of the band of German professors who launched the far-right AfD party. But the latest warning of a fresh crisis in the eurozone comes from a far more unexpected source: the European Central Bank (ECB). In its financial stability review published today, the ECB warns that the single currency could soon be plunged into a replay of the trauma of 2011 and 2012. Unfortunately, it is almost certainly right.
The review, published twice a year, is intended to warn the markets of impending risks to the system. Today’s update explores a familiar cocktail of risks, from the potential for a bubble in AI stocks to the danger that the return of tariffs might pose to the trading system. But it is the section on the risks to the eurozone which catches the eye. ‘Elevated debt levels and high budget deficits, coupled with weak long-term growth potential and policy uncertainty, increase the risk that fiscal slippage will reignite market concerns over sovereign debt sustainability,’ it notes.
Both Italy and France look alarmingly like Greece back in 2010
Roughly translated from the dry language of central banks, what it means is this: we are bust. The ECB identifies a toxic mix of zero growth and high, escalating debts that could potentially trigger a repeat of the 2011 crisis. France is now in deep fiscal trouble, with the government still spending 6 per cent more of GDP than it collects in taxes every year. Added to this, thanks to the political deadlock which has existed since President Macron’s decision to call rash elections earlier this year, there is little sign that the French parliament will ever be able to agree on serious cuts to spending –or that the French would tolerate it if they did.
Likewise, the Italian economy was meant to have been fixed by the €400 billion (£334 billion) it got from its neighbours under the EU’s coronavirus recovery fund in 2020. But the cash seems to have mostly been frittered away on vanity projects, and the economy has now ground to a halt between them.
Both countries look alarmingly like Greece back in 2010, with rising debts, zero growth, and a political system that is incapable of addressing the issue. Of course, the ECB is taking a risk by warning of trouble ahead. After all, if that prompts investors to start bailing out the market it could quickly become a self-fulfilling prophecy.
Even so, the ECB clearly felt that this was a chance worth taking. It wants to bully governments into taking action to start bringing their debts under control again – because if they don’t, it will soon be too late.
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