Eurozone faces no 2010 wildfire, but a slow-burn decline

Only, some in the boat are baling and paddling more vigorously than others. As Bank of France Governor François Villeroy de Galhau told a radio interviewer recently, France is alone in not having made the reforms that many of its neighbors (“even the Italians!”) have made since the last crisis. And, while political will at the top of the EU pyramid is solid enough, Barnier’s government fell precisely because the opposition majority in parliament — playing to their respective bases — refused to endorse them.

Marcel Fratzscher, head of the Berlin-based German Institute for Economic Research (DIW) warned that the multiple-whammy of crises has left people poorer than they would otherwise be and fed support for populist parties. That in turn has paralysed the political process and is now preventing much-needed reforms.

Bank-sovereign nexus weakened

To Vitor Constancio, who served as ECB vice-president through most of the eurozone debt crisis, the main difference between now and 2010 is that the banking sector is now much more resilient, posing little risk to the economy and the public coffers. Across the largest banks in the region, the so-called CET1 capital ratio — a benchmark for financial strength — has risen to over 15 percent from below 13 percent when the ECB took over as supervisor in 2014.

That’s important given how insidiously the bank-sovereign nexus worked last time around. The sovereign debt crisis was preceded by the Global Financial Crisis, in which banks’ massive losses necessitated capital injections and guarantees from governments which, ultimately, couldn’t afford them. Then, when governments needed the money, the banks they had traditionally relied on to buy their bonds a crisis couldn’t oblige.

But while bank balance sheets have strengthened, public ones have weakened, due to a lost decade of growth and a succession of economic shocks. The aggregate deterioration has been relatively modest: gross government debt has only risen from 83 percent on the eve of the sovereign debt crisis to 88.1 percent as of the middle of this year. But that masks a sharp deterioration in France, where debt has risen to 110 percent of GDP from 89 percent in 2010.

It could be worse. Praet argued that, while French public debt is clearly too high, the country is facing a political crisis, not a solvency crisis. At least in the short term, “there are no doubts that France can finance its budget,” he said.