In positive week for eurozone, warnings rise that crisis isn't over

Europe is heaving a sigh of relief. A messy Greek default has been averted, a permanent rescue fund is about to be installed to prevent future “credit events” with EU governments, Europe’s banks have received massive cash injections from the European Central Bank (ECB), and there is relative calm in the financial markets.

Is this the beginning of the end of Europe’s debt crisis?

No, it is not, warns Jens Weidmann, president of the German central bank, the Bundesbank, and former economic adviser to Chancellor Angela Merkel.

“At its roots, the debt crisis is a crisis of confidence in public finances, and one of competitiveness of certain European economies,” Mr. Weidmann told reporters in Frankfurt earlier this week. “These issues have to be addressed by national policymakers. If our liquidity provision results in these politicians not addressing the problems, we have gained nothing.” 

The remarks were a rather undisguised criticism of the ECB – on whose governing board Weidmann sits – and its strategy of pumping cheap money into the European banking system to spur liquidity. In the past few months, the ECB has handed out more than a trillion euros worth of three-year loans to European banks at a mere 1 percent interest. ECB president Mario Draghi was praised widely for his initiative, but the strategy, Weidmann said, could encourage banks to adopt unsustainable business models and governments to slow the pace of fiscal and structural reforms.

The argument of the central bankers overshadows a week of optimistic signals in Europe. On March 12, the eurozone finance ministers agreed on the full release of the second bailout package for Greece, worth €130 billion ($170 billion). By March 14, the decision had been backed by all eurozone governments and parliaments. Earlier this week, the rating agency Fitch upgraded Greece’s credit rating by one notch to a B-minus – the first time Greece's rating has been upgraded since the debt crisis exploded at the end of 2009 and the first Fitch upgrade since 2003. Today, the International Monetary Fund (IMF) confirmed it was providing its share of €28 billion ($36.6 billion) in the aid package for the struggling government in Athens.

Greece can now pay back its creditors when €14.5 billion ($19 billion) in debt is due in five days' time. And it can start implementing a painful and controversial austerity program that is meant to reduce the mountain of sovereign debt from 160 percent of GDP today to less than 120 percent by 2020.

“This is a unique opportunity for Greece that should not be missed,” said eurogroup leader Jean-Claude Juncker. 

But while Greece looks at months, probably years, of hardship and frugality, and a default can still not be ruled out as the country goes through a deep recession, Europe’s banks emerge as the beneficiaries of the crisis, according to Michael Sauga, a German economist and author of the recently published book “The Descent of Money – How Banks and Politicians Gamble with our Future.”

In his view, the ECB has succumbed to the US doctrine, which defines the role of a central bank as not simply keeping inflation low, but stimulating the economy through cheap money. “It’s a safe game for the banks,” says Mr. Sauga. “They borrow for 1 percent from the ECB, use the money to buy Spanish bonds for 5 percent, and place these as collateral again at the central bank, thus shifting the risk. A new version of the well-known model: Privatizing profits, socializing losses.” 

“Draghi didn’t have a choice,” says Wolfgang Münchau, president of the Brussels-based research firm Eurointelligence. “His intervention saved the euro.”

But echoing Mr. Weidmann’s concerns, Mr. Münchau argues that it is exactly this intervention that takes the pressure to act off the politicians. “The crisis is far from over. And when it returns, we’ll realize that the ECB has no ammunition left," he says.