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.