Broken and bruised, the euro staggers on

There was admittedly a little more evidence of action yesterday; the ECB further cut interest rates, and it also announced an asset purchase programme of unspecified size. Yet it stopped well short of the big bazooka of full-scale quantitative easing needed to address the growing threat in Europe of a deflationary vortex. Too little, too late, has been the ECB’s touchstone throughout this six-year crisis, and it is a mindset that shows few signs of changing.

This is not Mr Draghi’s fault. The ECB is ill-formed, too compromised by conflicting economic interests, to be able to take evasive action. It is only when at the very brink of abject ruin that effective policy becomes possible. The eurozone is hurting economically, but the existential threat of a few years back has gone, and with it the will for timely therapy. Draghi is like a man with his hands tied behind his back. His frustration is ever more evident in a wearied and resigned demeanour.

So what prevents Mr Draghi from playing a more effective role in raising Europe from its sick bed? In a word – Germany. This is not to criticise the German stance on Europe’s illness, which from its own perspective is entirely logical and justifiable.

If Mr Draghi does his bit in monetising southern Europe’s debts through QE, it will be the Germans as Europe’s main creditors who end up picking up the tab – not directly of course, but indirectly, through the mechanism of a debauched currency. Furthermore, such action would likely put off the implementation of necessary structural reform in France, Italy and beyond. Europe would be back to its delusional ways; never embark on painful reform when there is always the easy option of money printing to do the work instead. Thus far Germany has denied Europe its monetary fix.

This would not happen in an ordinary sovereign country, where monetary burden sharing of the type demanded by southern Europe is a well accepted part of the economic landscape. The north of England, for instance, is routinely subsidised by the south, and the debt to cover shortfalls is essentially bullet-proofed against default by the backstop of the Bank of England’s printing presses. Within a single nation, nobody thinks anything of such arrangements. But in a currency zone of 18 fiscally sovereign countries, each with its own social security arrangements, pension provisions and investment priorities, it becomes much more problematic.

To survive in the long term, the eurozone needs to become much more like a single country, but this gives rise to a familiar problem; northern Europe won’t accept such a sharing of obligations until southern Europe becomes much more like itself. It’s chicken and egg, and a modern version of Germany’s historic problem; too big and powerful to be easily integrated by the rest of Europe, Germany is also too small and culturally alien to others to be accepted as a benign, unifying force. The resulting standoff is a tragedy to behold. Europe’s leaders, all puffed up with their own sense of destiny and self-importance, have badly failed their citizens. The only curiosity is that they are still there.

Unlike some of my colleagues, I don’t have the satisfaction of being able to say I told you so. I was once a European enthusiast and, against wiser counsel, went along with the idea of the single currency as a logical next step in Europe’s march towards ever greater prosperity and economic integration. The result has been precisely the reverse.

Since the advent of monetary union, a once confident and optimistic continent has fallen into a state of seething unrest, political turmoil and economic misery.

The euro will probably stagger on in some shape or form. Broken it may be, but fear of what comes after acts as a powerful guarantor of survival. Can it ever expect to justify the price being paid? The judgment of history is unlikely to be kind.

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