We only bought time
Whenever the crisis abated and markets revived, hopes were rising that the worst was over. Immediately, commentators started to proclaim that German chancellor Merkel’s and finance minister Schäuble’s strategy of small steps had proved successful. The truth is that it is mainly thanks to the ECB that the crisis has not yet ended in a collapse of the euro area. But the actions of the ECB have only bought time.
Unfortunately, this period of relatively benign market conditions is not used effectively as political decision makers have resorted to complacency and put off necessary projects to overcome the crisis like a genuine banking union. As long as a viable political solution is lacking, the danger is by no means averted. At the same time, the economic and social costs of reinforced austerity are ticking time bombs that threaten the internal and social cohesion of Europe to the extreme.
Political reluctance and wrong recipes have already cost us dearly. Since 2010, the economy of the entire euro area grew by three percentage points less than its U.S. counterpart. This is equivalent to a loss of 270 billion euro! And while the U.S. economy creates jobs, another three and a half million people became unemployed in Europe.
Although the crisis countries make progress in gaining competitiveness and adapting their economic structure, they are stuck on a treadmill in three ways: First, austerity is compressing domestic demand which leaves already tumbling banks reeling and causes public debt to rise due to lower tax revenues and higher social spending. Second, the improved trade balance of the euro area tends to strengthen the euro which implies a loss in competitiveness. And third, deflation in crisis countries (through falling wages) reduces nominal output even further which causes the debt-to-GDP ratio to increase despite harsh consolidation measures.