Matthew Lynn: Europe's Sovereign Debt Crisis is Only Getting Started.

Matthew Lynn:

Causes remain unaddressed as bailout bitterness grows, writes Matthew Lynn.
The euro area is growing again. The banking system has survived its stress tests. The Greeks have implemented their first austerity measures with some success. The fevered predictions of the early European summer, that the euro was doomed and that Europe’s sovereign-debt crisis would rip through countries such as Spain and Portugal like a virus, have been forgotten. The crisis appears to be over.
Don’t believe it. Under the surface, the cracks in the euro are getting worse. The imbalances in the euro area are growing all the time. The resistance to the bailout package will rise as the terms turn out to be immoral and absurd. And the big-deficit nations are locked in a downward economic spiral.
The euro has bought itself some time, at a huge cost. And yet little has been done to fix the causes of the crisis. True, there have been signs in the past month that the situation has stabilised. Last week, the European Union said the 16 economies sharing the euro grew 1 per cent in the second quarter, the strongest rate of expansion in four years.

Most of Europe’s banks passed the ”stress tests”, designed to judge their ability to withstand financial market shocks, easily enough. The euro has also strengthened to $1.28 after reaching $1.19 in June. Even Greek stocks are looking healthier: the ASE Index of leading shares quoted in Athens has bounced back to more than 1600 from less than 1400.

Think again. We should be sceptical.

First, the euro area remains as imbalanced as always. Take a look at those growth figures. In the second quarter, German gross domestic product grew 2.2 per cent. Others didn’t do nearly so well. Greece’s economy shrank 1.5 per cent; Spain grew 0.2 per cent.
The debt crisis has even helped Germany by weakening the euro, thereby strengthening its exports. It has hardly helped nations like Greece because they don’t export much. Instead, the euro area is more lopsided. Germans are getting wealthier, yet they are being forced to subsidise Greeks, who are getting poorer. That won’t be sustainable for long.

Second, opposition to the bailouts may grow.

Slovakia has understandably refused to ratify its share of the rescue package. Any political system needs to be both fair and reasonable to command support. The terms of the bailout are neither. You can’t tell relatively poor, hard-working people who have played by the rules, like the Slovaks, that they have to help out countries that didn’t, such as Greece.

If the euro area is simply a mechanism for transferring wealth from the industrious to the feckless, it is hard to see it surviving. The responsible nations are going to want out.

Slovakia will no doubt be ignored. The EU doesn’t pay much attention to protests from its smaller members, particularly from Eastern Europe. But Portugal and Ireland, which will also have to help Greece, may join the protest soon.
Even if they don’t, the billions in aid and loan guarantees promised for Greece and the other deficit countries cannot be taken for granted. The new government in Slovakia was elected on a platform of opposing the bailout. ”Say no to the Greeks” is a great campaign theme and will surely be copied in the region.
Third, the Greek economy is in a terrible state. It may have delivered on the first round of the austerity package but the economy is still shrinking. With the government cutting spending and with strikes hitting the tourist industry, it is impossible to see it recovering any time soon.
Europe’s sovereign-debt crisis finished? It’s only just getting started.

Read more at The Euro Crisis and the Coming Euro Collapse Act II- Time to Check How Austerity Is Going

Matthew Lynn is the author of  Bust: Greece, the Euro and the Sovereign Debt Crisis

Read the original story at Israel’s Financial Expert

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