Another ill-advised rush towards Euro-pessimism

February 8, 2013

After a pleasant lull over the past six months, panic over the fate of Europe has flared once again. Just weeks ago the elites of Davos exuded confidence that the crisis had passed; the events of the past weeks showed how ephemeral such certainty can be.

But the easy resumption of dark prognostications is just that: easy. The siren call of Euro-pessimism should be ignored. It was wrong in 2010, and it will be wrong now. Europe faces hard years with no clear path, but that is not the same as dissolution and chaos.

So what changed? The British government of David Cameron spoke with atypical candor about the possibility of Great Britain leaving the Union. Scandals rocked the Spanish government of Prime Minister Mariano Rajoy, and Rajoy himself was accused of accepting illegal payments. In Italy, one of the larger banks, Monte dei Paschi, revealed that it had lost close to $1 billion in hidden derivative transactions. More worrisome, looming parliamentary elections that have seen the incredible (for anyone outside of Italy) resurrection of former Prime Minister Silvio Berlusconi, who has managed to surge in the polls even while on trial for paying an underage woman for sex. The prospect of Berlusconi’s return coupled with a crippled Spanish government have raised the prospect that neither country will continue their long march to structural economic reform.

The reaction of financial markets has been swift and predictable. Bond yields on Spanish and Italian debt jumped after months of calm. Soaring costs of borrowing led to a sell-off in Europe’s stock markets. Said one analyst: “Investors are once again being spooked by political uncertainty from both Spain and Italy as both countries … could derail ongoing and future reform.” As we saw in 2010, 2011 and again in 2012, once that cycle begins, it can deteriorate quickly. Now, Cyprus has asked for financial assistance from Europe. While Cyprus is even smaller than Greece, even that was enough to further unsettle an already unsettled situation.

The sudden reemergence of Euro-fear says something about how easily the financial world and its media slip into pessimism about the current and future state of the world. Signs of stability and the ebbing of crisis are viewed instead as false dawns and head fakes. Hints of crisis and deterioration, however, are given oracular weight and accorded the greatest respect.

Yes, unemployment is eye-blinkingly high in Spain, with official figures at 26 percent and rising; Italy still feels more complacent than urgent; France more sourly perplexed, and Germany still adamant about fiscal rectitude above all. The government of the European Union remains more toothless than it should be about pressing matters such as pan-Europe banking regulations, and more powerful than anyone wants about minutia such as sports policy. Few who have been intimately involved in the various summits, high and low, over the past four years have departed feeling enlivened about the future prospects of European leaders arriving at bold answers and will then be actively endorsed by their various publics.

Euro scorn is thoroughly in vogue, in the United States and throughout Europe. You will find no greater dismissiveness than on the streets of London. And when the EU was awarded the Nobel Prize last October, Greeks derided it as a cruel joke. We’re in the midst of economic war and being turned into a colony, scoffed one politician. On Wall Street, I regularly hear traders snicker about the fate of Europe – when they’re not in full panic mode. In Europe itself, the mood is often far darker.

And yet, the union prevails. The point of the Nobel award was to highlight how remarkable an achievement this has been, and what better time to highlight that than at a dark hour. Seventy years ago, European nations were annihilating one another, and they had been fighting bloody wars almost without respite for centuries and centuries. Now, worst-case scenarios have Greece returning to the drachma; Catalonia becoming independent; and London taking leave of an organization of which it has never fully been a part. Today’s worst-case scenarios would have been yesteryear’s dreams.

Even those scenarios appear unlikely. Analysts all have opinions here, and they are just that. The Citigroup economists who boldly predicted last year that there was a 75 percent chance that Greece would depart the EU by Jan. 1, 2013 also just had an opinion, however numerically expressed. Yes, the European Union with the euro as a unified currency is fraught to the point of existential angst in its current form. But as has been true at each juncture over the past years, there is no way out of the current impasse except through it. There is no exit strategy, no Grexit strategy, no viable path to unwind the union or the euro except at such monumental cost that the pain of trying to move forward is a better trade than the agony of dissolution.

And that, truly, is the only litmus test for what will happen: Which alternative is worse? That is not the stuff of dreams, but it is often the axis of struggle. The European Union was born of hope for security and prosperity sealed by common bonds of currency and government. It has achieved that. Now, all are searching for the next formula for a different demographic and global future. It’s a hard struggle, but a worthy one.

PHOTO: Mario Draghi, President of the European Central Bank (ECB), smiles after unveiling the new 5 euro note in Frankfurt, January 10, 2013.  REUTERS/Kai Pfaffenbach


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Zachary, you must be a EU employee earning +€16000/month plus perks.

Otherwise I suggest that you speak to thousands of pensioners in the Netherlands who see their pension cut down because “we have to do it from Europe”.

While in the region, also drop off some money at the foodbanks in Belgium, where now a substantial part of the population relies on that aid.

Also speak to some “new poor” who, because of austerity, fall under the bread line. And that ALL OVER EUROPE.

Or keep quiet and stay with the “EU elite” sipping champagne and mulching caviar, under the pretence of “important meetings” while the entire EU population is sliding down into the abyss.

Indeed, nothing has changed, it only is getting worse.

Posted by Willvp | Report as abusive

nice to see some common sense prevailing over reuter’s usual wallowing in anglosaxon triumphalism

and elitism – surely that brush tars the city of london corporation, glued like fridge magnets to bank bailouts and protected from parliamentary scrutiny

in fact the english parliament is dictated to “protect” the interests of those unelected thieves from the city of london

austerity is the price english taxpayers have to pay to prop up those libor-cheating, champagne swilling swindlers

Posted by scythe | Report as abusive

All empires fall. The undemocratic EU will be no different.

Posted by The_Spud | Report as abusive

FIGS instead of PIGS? The latest news from the EU summit indicates the beginnings of an understanding between Britain, Germany, and the Scandinavians — leaving France, Italy, Greece, and Spain (the FIGS) on the opposite side, exactly as George Soros had predicted last year. If this development should harden we may see a real split along those lines.

Posted by pbgd | Report as abusive

The article is interesting, we’ll see. The main problem with the EU is that they have perpetually papered over problems and popular discontent in order to move forward with both enlargement and institutional deepening. Clearly enlargement has happened too quickly and will be difficult to digest. The EU even in the aftermath of the good will wrought paradoxically by the war is a several hundred year project which has tried to be done in decades. With no exterior threats there is no rush. While there is no going bacl, without increased risks to the project, timelines should be set for future progress and institutional strengthening so everyone will know where and how fast things go forward. Slow in this case is preferable.

Posted by St.Juste | Report as abusive

How was Euro Zone pessimism “wrong”? It seems nearly everything described indicates that it was right-on as the recessions/depressions spread and are still spreading, so most of the down prognostications were correct and appropriate. Just because some were wrong about the extremes, the worst-case scenarios doesn’t mean they were wrong about more important core issues and more likely scenarios.

Those who were predicting a cataclismic collapse that would occur in a matter of days or weeks were wrong, but then was that ever realistic? The reality is that the situation is bad and growing worse. What could be worse than that for the largest collective economy in the world?

Posted by ptiffany | Report as abusive

“And yet, the union prevails.” Wrong word. An economically Socialist union that is fiscally unsustainable by the productivity of European society “endures”, but more like an elephant mortally wounded than a Mammoth standing strong in a blizzard.

“The European Union was born of hope for security and prosperity sealed by common bonds of currency and government. It has achieved that.” I respectfully disagree on both counts.

Only an osterich with head in sand might describe the current European economic situation as “prosperity”.
The latest Iranian missile capability and rhetoric show Europe in the cross hairs of an irrational and unpredictable radical muslim theocracy and American “protection” both questionable and fragmented by misguided and futile attempts to appease a stupid but still vicious Russian bear. The seeds of their own destruction are the very differences between the economic successes of northern Europe and the economic failures of southern Europe. The destruction of national societies is as absolute whether by war or economics.

Until Europeans figure out that they have to PRODUCE AND SELL enough to pay the economic cost of all those “free” holidays and health benefits they have NO “future” or any “way forward” but collapse.

Posted by OneOfTheSheep | Report as abusive

A. At least 80 percent of currency traders are amateurs – something most currency professionals admit.

B. These amateurs are the most Momo-chasing, easily persuaded participants in world markets.

C. They are manipulated like crazy as foot soldiers for the relatively few professionals.

D. And the vast majority of the professionals are utterly crazy.

E. Meanwhile, we participants in non-currency markets have to suffer for their excesses, again and again.

The only way out of this is the same as it has been for a long, long time now: Impose a large enough worldwide coordinated Tobin Tax on currency trading and greatly limit acceptable leverage, for amateurs and professionals alike.

Currency trading must cease and desist being the mammoth tail that controls the animal of world markets.

Posted by Venerability | Report as abusive

What is the opposite of an edgy optimist? It’s not a conforming pessimist but merely the humble realist. Optimism and pessimism are two sides of the same coin with realism being the edge betwixt the two.

The problem with the Edgy Optimist’s post is that he is paying too much attention to market moves. The euro wasn’t dead over the summer, and it wasn’t fixed in the fall and winter. Hence, the current market does not indicate pessimism among market participants. PIIGS bonds yields and stock markets have declined in response to-who knows-what but profit-taking and the shrinking of the ECB balance sheet are as good explanations as the political machinations in Italy and Spain.

The euro is causing the slow decay of the Eurozone economy. Its very existence causes imbalances among its members. As long as the euro exists, so will these imbalances. As long as the system remains weak, its survival is in doubt no matter what you think the market is telling you.

The cult of the euro loves to paint the euro as this great love-fest that has prevented war on the continent for almost 70 years. This characterization is wrong.

What prevented war in Europe was NATO, millions of American and British troops standing in harms way in Germany and trillions of dollars spent by the U.S. and a broke U.K. during the Cold War to counteract Soviet aggression. The Nobel Prize should have been awarded to the troops who manned bases in West Germany until the dissolution of the USSR, not the eurocrats.*

It is optimistic to believe that the EU prevented WWIII, but it is realistic to know that trained, armed soldiers and the best weapons in the world are really what did the job.

At least author admits his bias, and this is what leads him to misunderstand the costs of a euro dissolution. He fails to see that the costs will not be borne equally by the members.

Creditor countries like Germany with large Target2 credits will be hit the worst. The Germans will also revert to a fairly valued mark that will crimp exports. Debtor countries like the PIIGS will immediately be relieved of crushing debt through a devalued currency that will create an export boom at the price of high inflation in the short-term. See Iceland and Argentina from 2001 for examples.

As long as some countries may benefit from an exit, the eurozone is in danger of dissolution, and that is a realistic assessment, not a pessimistic one.

*My father and the fathers of my friends selflessly went to Europe to preserve the peace during the Cold War, so please forgive me if I become a bit jingoistic when discussing this topic.

Post with charts and links here

Posted by dareconomics | Report as abusive


so true !

but you should send also to the EU-non elected dictators whose only achievement per todate is the impoverishment of millions of Europeans.

Posted by Willvp | Report as abusive

Euro transformed Europe to a united in Currency traveling paradise. As in the US, Europeans may travel and use the same currency in vast geographical Space. But Europe psyche is not happy. Profit and Euroseceptics are trying to destoy the Europe ideal that begun alsmost after the end of World War II. Money Laundering, Lawlessness, a Euope of small nations is the wish of many Eurosceptics. The citizens of Europe are quiet.Listening to the Greeks is like one hope they had never entered the union. The Europe Idea must continue. All European Citizens must endure and assist in the developemnt of their Continent to an American Dollar Model. Destroying the Euro now will be a 200 year mistake

Posted by harrycayce | Report as abusive

More FRAUD & CRIMINAL FARCE from the IMF & EU COMMISSION — What a joke Mario Draghi (wo worked for corrupt Goldman Sachs) and Olii Rehn, Merkel, Herr Schnauble (“Dr. Strangelove”), and Legarde are ! — Did you know IMF head Legarde had he house raided by French Police for financial fraud?

Incredible the major Criminals we have running the Euro zone now!!!

Posted by EcoTank | Report as abusive