Is the euro crisis over? Depends on how you define "crisis." If you define it as an existential threat to the currency, it's pretty much over. But if you define it as a political and social crisis, this pig has legs.
Almost four years after Greece invented what was then known as the "debt crisis," there seems little risk, at least in the near term, that the 17-country euro zone will blow apart. The moment of truth came in June, 2012, when the slow-motion bank run in Greece suddenly accelerated ahead of the general election, threatening to destroy the banks and the economy along with it. Greece would have had no choice but to reprint drachmas. The bank run reversed after the election, narrowly won by a pro-austerity, centre-right party that dutifully followed orders from the European Commission and the International Monetary Fund.
The euro zone has entered Stage Two of the crisis, political upheaval. It might be followed by Stage Three, social upheaval, before the next generation of politicians finds something workable to keep the euro zone more or less intact.
The political crisis is in full swing. During the height of the debt crisis, between 2010 and 2012, many governments fell in the great, pan-European "throw the bastards out" uprising. David Cameron's Tories, with the Liberal Democrats at his side, sent Labour packing. France's Nicolas Sarkozy lost to the (allegedly) austerity-light socialist François Hollande. The conservatives swept away the socialists in Spain. In Italy, Silvio Berlusconi lost the trust of the troika (the EC, the IMF and the European Central Bank) and was replaced by the pro-reform, pro-austerity Mario Monti.
But the new governments are proving no more popular than the old ones as economic and social problems deepen, making their campaign optimism look foolish or naive. Both France and Mr. Hollande are in trouble. His pledge to find an alternative to harsh austerity went nowhere and the reform agenda is stalled. Budget deficit targets are being missed, the economy is sinking, debt and unemployment are rising and Mr. Hollande's popularity, at 27 per cent, is going in the opposite direction. Ditto Spain, where the aggressively charmless Prime Minister Mariano Rajoy is now considered part of the problem, not the solution. Plus he faces an ugly corruption scandal.
Italy is farthest along the political crisis curve. The troika's beloved Mr. Monti was crushed in the inconclusive Feb. 24 election and the mainstream parties have since been incapable of forming a government. The party that won the most votes was the anti-establishment, anti-austerity and vaguely anti-euro Five Star Movement founded by Beppe Grillo, who has emerged as Italy's most powerful political figure, even if he did not campaign and does not hold office. The next European elections could toss out the established centre-right and centre-left parties. In Greece, the anti-austerity, radical-left Syriza party is again on the rise and the neo-fascist Golden Dawn is polling at about 10 per cent.
The remarkable rise of Mr. Grillo, a comedian whose party did not exist four years ago, and the plummeting popularity of leaders in France, Spain and elsewhere, is powerful evidence that voters are no longer convinced the European project is working in their favour. Austerity was supposed to reverse the economic malaise and ensure the sustainability of government finances. It has not. Job destruction continues. Economic reform that would free up markets and boost competition has stalled. The rich are staying rich and everyone else is getting poorer.
The recent sell-off of the markets, notably gold and oil, partly reflects the ailing European economy and government instability. Even Germany, the continent's last economic powerhouse, is not immune to its neighbours' economic flu.
The big risk is that the political phase of the crisis turns socially ugly, as it has in Greece. Spain is at breaking point and France and Italy may not be far behind.
If by some miracle new political leaders are elected before these economies go down the toilet or explode in demonstrations and riots, what will they do? More austerity is a non-starter. Instead, government leaders will have to restore growth to create jobs and shrink the relative debt. That might require overhauling the entire European project.
One option floated now and again is the creation of two-speed Europe – roughly north and south – with a two-speed euro. The weaker southern euro might be worth 30-per-cent to 50-per-cent less than the northern euro. While the launch of a cheapie euro sounds unlikely, even impossible – imagine how much damage it would do to Germany's export machine – consider that one sort of exists already. Thanks to capital controls in Cyprus, where the banking system had to be rescued, a euro trapped within Cyprus is worth a lot less than the same euro that is in free circulation elsewhere in the euro zone.
While the euro remains intact, optimism in the common currency is fading fast. The crisis, in a different form, is alive and well. The question is whether the next stage will save the euro or destroy it.