How Europe's Currency Survived 2012 Intact

The Wall Street Journal
http://online.wsj.com/article/SB10001424127887323300404578205580657203900.html

Leaders Muddled Through, but Bought Time for the Euro Area, Which Enters 2013 With All 17 Members Along for the Ride

With three days left of the old year, there's still time for even this prediction to go awry. But let's stick our necks out: Contrary to some expectations, the euro zone will end the year as it entered it—with 17 members.

 

What this column described a year ago as "the unswerving commitment of euro-zone leaders to muddling through" has bought the common currency another year at least. And here, in ascending order of importance, are the six events that ensured the bloc's survival through 2012.

March 9: Greece completes the largest sovereign-debt restructuring in history. This was significant not because it resolved Greece's debt overhang: Nobody thought wiping 53.5% of the face value of most of the country's €206 billion ($272 billion) debt to private investors was a long-term debt solution, as a subsequent bond buyback emphasized. But it bought time for politics by lessening tensions over whether Greece would be able to meet a heavy debt-repayment schedule.

Sept. 12: Germany's constitutional court backs the euro-zone's permanent bailout fund. Few analysts thought the court in Karlsruhe would decide that the European Stability Mechanism was unconstitutional, but an adverse ruling would have thrown the bloc's crisis-management plans into disarray. The ESM started operation on Oct. 8, after ratification by all 17 member states.

June 17: Greece's second general election. It yielded a narrow advantage for the "pro-reform" New Democracy party of Antonis Samaras over its main rival, the left-wing Syriza Party, following the failure to form a government after the first election on May 6. The closeness of the election—less than three percentage points separated first and second place—is a useful corrective to the assertion that the euro's survival intact in 2012 was somehow predestined. This was a close-run thing.

June 29: The commitment by euro-zone leaders "to break the vicious circle between banks and sovereigns." This political commitment to stop weak banks from dragging struggling governments down with them into the financial abyss is as yet unfulfilled—and there have been subsequent efforts (not least by the finance ministers of Germany, Finland and the Netherlands) to narrow its interpretation to the point where it would be unable to influence the current crisis.

However, euro-zone governments followed up on Dec. 13 by agreeing to establish a single bank supervisor. This supervisor needs to be "effective" before the ESM can directly inject capital into banks, the governments have decided, a step that appears unlikely before spring 2014. The June 29 commitment eclipsed the June 9 decision of euro-zone finance ministers to agree to lend up to €100 billion to the Spanish government to help shore up its banks. In the event, Spain asked for much less: €39.5 billion.

Oct. 9: German Chancellor Angela Merkel travels to Athens. This was symbolic of Berlin's commitment to keep Greece in the euro—a step that might not have been possible if events on June 17 had turned out differently. It appears to have closed down, at least until after German elections next fall, policy discussions over whether Greece should be forced out of the euro. Most financial analysts argue that a Greek exit in 2012 could have triggered unstoppable contagion in the euro zone—and could have been, even in narrow financial terms, more expensive to Germany than Greece staying put.

July 26: The most important development: Mario Draghi, president of the European Central Bank, makes a promise. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," he told an audience in London. The elaboration on Sept. 6 of this pledge—the Outright Monetary Transactions program of government-bond buying—was viewed as convincing enough to lift doubts, at least for the time being, about whether the financing troubles of Spain and Italy would force them out of the euro zone.

It was convincing because, while it depended on a government submitting to conditions attached to a bailout program, it also promised to be "unlimited," raising questions among would-be speculators over whether they really wanted to fight the ECB's balance sheet. The program also addressed a critical doubt that had plagued the euro zone for three years: Would the legal constraints on the ECB prevent it from acting effectively to keep the euro together? Perhaps it was never sensible to assume that the ECB chief would willingly preside over the disintegration of the euro. Yet betting the contrary had been a winning financial-market strategy for 2½ years until this summer.

Some significant events are omitted from this list, including the Jan. 30 accord among 25 of the 27 European Union leaders on a pact to tighten budget discipline. However, while potentially important to the future functioning of the euro zone, their impact on lifting the immediate financial crisis seems to have been limited.

There is much unfinished business. Some of these key events are still just promises. The OMT remains untested, and the sovereign-bank doom loop hasn't yet been broken. Greece isn't out of the woods, with its debt widely recognized as too high and its politics difficult. And then there are the Italian and German elections. All of which should be more than enough to keep us busy in 2013.

Write to Stephen Fidler at stephen.fidler@wsj.com