Governor of the Bank of England, Sir Mervyn King, said recently of the crisis: “I think we’re beginning to see a few signs now of a slow recovery, but it will be a slow recovery”.
Let’s hope that Sir Mervyn is right about recovery being on the horizon. The euro area has certainly had its fair share of financial hardship, with Greece in particular feeling the pinch. King went on to say that “..after a banking crisis one can’t expect to get back to normal and I fear it will take a long time.”
King is right about one thing – there’s no such thing as a “quick fix” solution. The UK is currently in the midst of a double-dip recession; this means that the economy has been in recession for two consecutive quarters of a year, and that, following a brief hiatus period of growth, it has shrunk once again. Euro zone leaders are trying to bring the debt in line using a series of austerity measures, but really these are a case of damage-control rather than cure.
This double-dip recession is the longest for over 50 years, and this kind of financial black cloud may have long-term repercussions. King seemed wary of the government’s cost-cutting agenda, saying that a failure to meet austerity targets would be acceptable in some cases. Essentially, King said that if slower economic growth proved to be a global phenomenon (in other words, provided that everyone else were stuck in the same boat) then the UK could struggle through austerity failures.
Where to next? Well, several upcoming events will have a big impact on the euro area, namely;
- The outcome of the recent Dutch elections
- The ruling of the German Constitutional Court on the ESM
- The Federal Open Market Committee (FOMC) meeting in October
- The upcoming US Presidential election
- The next EU Summit
Without knowing what will transpire at these key events, it Is difficult to speculate about the crisis.
In a recent news report by the Guardian Newspaper, Latvia was said to be “still keen” to join the euro area despite the financial crisis. In fact, Latvia plans to apply for euro membership in 2014. This enthusiasm for euro area membership, even in the face of financial crisis, bodes well for Europe.
If euro area membership is still seen as an attribute, confidence in the euro area’s ability to stage a financial recovery must be high. In particular, the recent discussion around euro bonds (shared euro area debts) does not seem to be putting-off applicants; if anything were to serve as a disincentive, euro bonds would be it. If confidence in the euro zone as an institution is high, then one might also logically expect that investor and buyer confidence may soon follow.
There are other positives on the horizon: The European Central Bank (ECB) has just announced its new bond-purchasing program, a move which it is hoped will change the face of EU finances. Essentially, the new program will cheapen borrowing costs for troubled euro zone countries, allowing them to grow their economies without simultaneously heaping even more debt onto the ever-growing euro zone pile.
It couldn’t come at a better time; unemployment figures for Northern Ireland currently stand at 8.2%, and the Italian economy shrunk by 0.75 in the second quarter of the year. Europe needs to see light at the end of the tunnel, and the bond-purchasing program is a move in the right direction.