Eurozone Crisis?

Douglas J. Elliott, partner at Oliver Wyman in New York, expert on financial regulation and public policy issues, writes about a potential risk for a new “Euro crisis”, which probability of occurrence will depend on the final balance between positive and negative factors of the current Eurozone’s situation.

His central scenario is a new version of the Euro crisis (sequel of the 2010-2015 euro crisis) over the next two years, where negative factors will weigh more than positives, but in which “Europe once again works through it without a breakup of the Eurozone or other extreme outcomes”. However recent positive developments in the region (European Commission’s proposal for a €750 billion Recovery Fund) lead him to lower this probability below 50 percent.

Negative factors (”Reasons for concern”): 

• Sovereign debt levels in many countries exceed the levels of 2010
• Political environment is worse now and Coronavirus Recession is deeper than in the Great Recession
• Corporate sector is overloaded with debt in many countries

Positive factors (“Reasons for hope”)

• The European Union and the Eurozone have more economic & financial tools than in the previous crisis and are using them
• Considerable potential for further Eurozone integration 
• The nature of the recession cause garners sympathy for weaker countries
• Interest rates are lower than in 2010 

In any case, the final outcome of the Covid-19 crisis in the European Union will depend on the evolution of some crucial issues such as the uncertainty about the final economic recession, the weakness of the Eurozone due to lack of fiscal integration and banking union and the potential impact of the German Constitutional Court’s rulings on ECB’s powers.