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Tom Holland

I know it sounds nuts, but the euro zone is not suffering a financial crisis.
If you don't believe me, just look at the figures.
Last year, the euro area's economic output grew by 1.4 per cent. That's hardly spectacular, I know, but it's not much worse than the United States, which grew by 1.7 per cent, and it's considerably better than Japan, which contracted 0.75 per cent.
What's more, the euro zone's debt levels look manageable. At 4.1 per cent of gross domestic product, the euro area's total government deficit last year was higher than it would have been in an ideal world. But compared to the US, which ran a budget deficit of 9.6 per cent, or Japan on 10.1 per cent, it looked modest.
Similarly, at 68 per cent of GDP, the euro zone's net government debt level appeared sustainable compared to the US on 80 per cent or Japan on 127 per cent, especially as the euro area runs a savings surplus and can fund its own debt, unlike the US.
No, in overall terms, the euro zone isn't suffering a financial crisis; its problems are political.
Consider Spain, which desperately needs an estimated Euro40 billion (HK$387 billion) to recapitalise its stricken savings banks following the bursting of the country's property bubble.
With investors now demanding punitive yields approaching 7 per cent to hold Spanish government bonds (please see the first chart), borrowing the money from the capital markets is out of the question.
That leaves the euro zone's bailout fund, which from next month will boast resources of Euro800 billion.
The trouble is that because Europe's richer governments wanted to avoid creating risks of moral hazard, the terms under which the fund was established do not permit it to inject capital directly into ailing banks.
That makes it difficult for Spain to draw on the fund to rescue its banks, especially given the reservations of Germany, which ultimately holds the euro zone's purse strings.
Speaking to the German Chamber of Commerce in Hong Kong yesterday, Michael Fuchs, deputy chairman of Germany's ruling Christian Democratic Union,  argued that German taxpayers have already paid heavily to bail out their own savings banks.
'This is not possible again,' he declared. 'Our taxpayers will not allow us to do it a second time.'
For similar reasons, Fuchs poured cold water on the idea of centrally-guaranteed 'euro bonds', which could allow indebted Southern Europe to borrow at the advantageous interest rates enjoyed by the richer North. 
That, he insisted, would simply encourage governments to revert to their bad old ways of deficit spending. Not until members have proved they can adhere to the euro zone's new fiscal compact will euro-bond issues become viable.
Even so, it's possible that Spain's immediate problems can be surmounted. But given Europe's polarised political climate, it's hard to see how Greece can successfully remain within the single currency.
With opinion polls indicating the anti-austerity party Syriza is gaining ahead of the June 17 election, it is likely that Greece's next government will demand a renegotiation of the country's bailout package, asking the 'Troika' of the European Commission, the European Central Bank and the International Monetary Fund to accept more moderate spending cuts and less drastic structural reforms.
In reality, however, Greece will not be asking the Troika, but the German government, And Athens will not get a sympathetic hearing.
With a general election scheduled for September of next year, German politicians are anxious to avoid creating any impression German taxpayers could end up bailing out their southern neighbours, especially when Greeks are entitled to generous state pensions from the age of 55, but Germans must work until age 67.
Yesterday Fuchs was adamant that if Greece is to remain a member of the euro zone, Athens must stick to the hard path of austerity, cost-cutting and deficit reduction.
However, given Greece's near 40 per cent increase in unit labour costs since joining the euro, he did concede that making the necessary adjustments may prove politically impossible.
'There could be a slight chance of Greece stepping outside the euro this year,' he conceded.
That's putting it mildly. Although the euro zone as a whole looks to be in relatively good financial health, the continent's widening political gulf between north and south must surely mean the chance is far greater than slight.



Europe's financial crisis is actually anything but