Judy Asks: Will the eurozone crisis come back?

The euro crisis never went away and will worsen sharply once the economic cycle turns. The eurozone is struggling to grow by more than 1.5 percent a year, at what is likely to be the peak of the economic cycle and with output scarcely back to precrisis levels. The single currency bloc still lacks essential institutions such as a fully fledged banking union or a mechanism to transfer funds between member states. Nor is there coordination of macroeconomic policies to ensure an adequate level of demand across the currency union.

The eurozone will in all likelihood enter the next downturn with interest rates at zero and with high levels of debt and unemployment. The European Central Bank will not be able to cut rates, and those member states most in need of fiscal stimulus will have least freedom to impart it. The result will be a renewed recession in countries that will not have recovered from the previous one, against a backdrop of persistently strong support for populist parties, and with banks still weak and still essentially backstopped by weak sovereigns.

At this point, it will be make-or-break regarding the big institutional questions. It’s possible eurozone governments will bite the bullet and agree on genuine risk-sharing federal institutions. But it is just as likely they won’t.

Simon Tilford is deputy director at the Centre for European Reform.