There is increasing evidence that the past several weeks of quiet on the eurozone front were the lull before the cloudburst. The underlying political problems of the eurozone have once again poked through the financial blanket laid out by the European Central Bank. The social cost of austerity has begun to angrily spill out again. And the combination of both has unnerved the market. Economic confidence in the 17 countries of the eurozone is at its lowest point in three years say surveys.
Europe no longer teeters on the edge of the precipice, as it did earlier in the year. Definitely, the demonstrations on the streets of Madrid and Athens have not dented the determination of either Greece or Spain to continue their austerity measures. What is rocking the boat is a sudden weakening commitment by the credit-wealthy northern European nations to the June European Union agreement that the eurozone’s massive bailout fund could be used to directly recapitalise banks in financial difficulty. On Tuesday, the rich northern countries, including Germany, surprised by adding a number of conditionalities to the use of bailout funds for troubled banks. Coming at a time when there were fears that Spain’s determination to not ask for a bailout was becoming untenable, the res-ult was to see interest rates on southern European bonds soar. Pre-sumably, the grit shown by Greece and Spain and the strong statement by the European Commission that the northern governments would be held to the June agreement will soothe the markets.
But none should expect the sun to shine in Europe for some years to come. The present drama is merely a continuation of the summer's sovereign debt hysteria. The eurozone remains fundamentally flawed. Even as north Europe pays for bailing out the south, private capital is fleeing in the other direction. Italy and Spain saw a combined record debit balance of €724 billion in August alone. Germany experienced a credit of almost the same size. And with even Germany's jobless rating starting to rise, Europe seems set for a slowdown. A summer of crisis is moving to a year of doldrums.