World

The eurozone is having a terrible summer

21 July 2022

7:41 PM

21 July 2022

7:41 PM

A reforming prime minister has been ousted by a fractious, divided parliament. The central bank is raising interest rates to try and stem inflation that is running out of control. Everyone is being urged to use as little electricity as possible as officials scramble around to secure enough energy, and the currency is crumbling as the economy turns down. It would, in fairness, be a reasonable description of a chaotic and struggling Brexit Britain. As it happens, however, it is a summary of the EU and the euro-zone as it stumbles towards its next crisis.

It is turning into a terrible summer for the eurozone. In Italy, Mario Draghi, the technocratic former president of the European Central Bank resigned as prime minister today, a move that will trigger fresh elections and possibly lead to a populist far-right government. While Italian prime ministers come and go with an almost British regularity, Draghi’s departure is more significant than most. He was given more than 200 billion euros (£170 billion) in borrowed money by the rest of the EU to finally reform the Italian economy and make it a fit member of a monetary union with Germany and France. That expensive gamble has now clearly failed, and no one has any ideas left on how to fix a country with escalating debts and no growth.


Even worse, Draghi’s successor at the ECB, the politically astute but economically illiterate Christine Lagarde, will today raise interest rates for the first time since 2011. While inflation at 8.6 per cent across the zone, and more than 20 per cent in countries such as Estonia, may make that necessary, it will batter an economy hooked on debt and just about to plunge into recession. At the same time, the Bank is launching the weirdly titled ‘anti-fragmentation mechanism’ to control the bond markets, and specifically to prevent traders betting against Italian and Greek debt. And yet it is unlikely to be any more successful than the attempts by central banks over the decades to control the currency speculators. One way or another, the markets always win. It is just a matter of how.

On top of all that, the EU is desperately trying to persuade member states to cut back on energy consumption mainly to rescue Germany from its catastrophic decision to make itself dependent on Russian gas to keep its factories running. The Nordstream 1 pipeline that ships Russian gas into Europe was turned back on today, but supplies are still running at lower levels than normal. Whether there will be enough gas to keep the continent’s lights switched on and its factories running is open to question. If there is rationing, as there might be, it will hammer an economy that is already in trouble, especially as it will be the factories that get closed down first.

Add it all up, and one point is surely clear: the euro-zone is stumbling into its next crisis. For the last decade, printing vast quantities of money – and remember the ECB has printed twice as much as the Federal Reserve or the Bank of England as a percentage of GDP – has just about papered over the cracks in the single currency. So has deflation, and cheap energy. Right now, that is all falling apart at the same time. Whether it will be as bad as the crisis of 2011-2012 which almost ended with Greece coming within a whisker of leaving the euro zone remains to be seen. But it is going to be a very rough second half of the year. As chaotic as Brexit Britain is looking, it will be just as difficult on the other side of the Channel.

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