Nothing – especially not bad things – can happen in the eurozone so long as Germany is in election mode. That is the happy news for officials meeting in Brussels on Monday to decide whether to pay out another €8bn to Greece. This time last year, the eurozone was shaken by political and market events that sent bond yields up and sparked the “whatever it takes to save the euro” stance from Mario Draghi, president of the European Central Bank. Yet political crises in Portugal and Greece have sent barely a ripple through the eurozone. That may be due as much to Germany’s election on September 22 as to the ECB. The question is, what happens after the vote?
There is no doubt that contagion has lessened markedly. The crises in Greece and Portugal, essentially over coalition squabbles, destabilised local markets in recent weeks but did not disturb Spain and Italy. And those local markets are also recovering: Portugal’s stocks have recovered most of the near 7 per cent loss they suffered last week. Greece’s 10-year bond yield, at 10.5 per cent, is just a third of what is was a year ago.
The trouble is that the to-do list for after Germany’s election is getting ever longer. Greece’s position remains precarious, as its “troika” of creditors – the ECB, the European Commission and the International Monetary Fund – said on Monday. The chaotic bailout for Cyprus will surely have to be revised. Portugal’s problems may have put paid to its chances of leaving the bailout next year. Ireland’s legacy bank debt has to be addressed.
This agenda will demand, at the very least, a new approach from the new government of Germany (which looks likely to be led again by Angela Merkel). It will test the ECB, whose “whatever it takes” stance implies continued activism even as the US Federal Reserve moves in the opposite direction. Contagion may simply be sleeping until September.
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