Economist warns eurozone may need new feats of improvisation

As the economic shockwaves from Russia’s attack on Ukraine continue to roll, high-profile economist Adam Tooze told AFP on Wednesday that imaginative new measures may be required to stabilize the eurozone.

“There is a huge downside potential from Russia’s war in Ukraine, really dramatic, we have not seen the bottom on that yet,” Tooze said in an interview at the World Economic Forum in Davos, Switzerland.

“I’m not a eurozone doomsayer, but on the other hand one has to admit that none of the problems of the eurozone has been resolved,” he added.

The 2008 financial crisis, subsequent sovereign debt scares and the coronavirus pandemic have shown that the eurozone’s “survival consists in a series of improvisations, and you actually have to pull them off each time around,” the Columbia University professor said.

Most recently, in 2020, European leaders responded to Covid-19 with the “Next Generation EU” scheme, jointly borrowing hundreds of billions of euros to finance the recovery but assuring the most conservative member states it was a one-off.

Even so, the joint borrowing was far short of the trillions Tooze believes would be needed to put down sovereign debt fears for good and finance the continent’s green transition.

In 2022, “what we do have this time around are some very powerful voices that could push some more comprehensive and lasting settlement,” he added.

He namechecked Italian Prime Minister Mario Draghi — the interventionist former European Central Bank chief credited with saving the euro in 2012 — recently re-elected French President Emmanuel Macron, and a German government under social-democratic Chancellor Olaf Scholz rather than his conservative predecessor Angela Merkel.

Bound up with the war and its impact on energy and food prices, soaring inflation is nudging the ECB towards ending its years of massive bond-buying stimulus and raising interest rates out of negative territory.

Both controversial interventions were designed to heave inflation towards the Frankfurt institution’s target — and soothed worries about the currency bloc’s most indebted governments.

Now Europe could underperform already weak output forecasts if the ECB throttles the money supply, bringing back the old fears.

“It’s the classic Keynesian thing, you can’t give the dead dog more leash and expect anything to happen — (and) on the contrary, if you yank the chain on a dead economy, you’re going to cause a recession,” Tooze said.

“There’s going to be a real crunch in the standard of living and purchasing power at the bottom end.”

A recession would remind investors and eurozone capitals that “the debt situation is even less sustainable than before Covid” in major economies Italy, France and Spain, Tooze added.

But the Ukraine conflict also provides exactly the kind of exceptional circumstance that could justify creative new solutions.

Throughout the existence of the EU and euro single currency, “part of the improvisation strategy is to use history… as a random number generator almost, to produce a series of excuses for breaking your own rules,” Tooze said.

“The Ukraine war could serve that purpose.”

Tooze is less optimistic about the wider West’s ability to deal with the most urgent economic fallout of the invasion — its massive blow to global cooking oil and grain supplies that threatens the world’s poorest people.

Tooze suggested that as major grain producers, Europe and the United States could make at least some impact quickly by completely eliminating subsidies for biofuels made from crops.

“That, in and of itself, I think would be a major gesture. It would indicate that they’re taking this seriously,” he said.

But “we have an appallingly bad track record on issues of global governance of late,” he added, pointing to Covid vaccine hoarding and lacking debt relief for the hardest-hit poor countries.

Of groups that could act, the G7 lacks bite as “they represent a tiny fraction of the world’s population,” Tooze argued.

And where “once upon a time we might have thought of the G20 as the muscle behind global governance initiatives and you could at least get the Chinese and the Russians to sign off on them, now the G20 is a kind of lame duck,” he added.