In the last three years, core and periphery in the Eurozone have struck a grand bargain: the core supports the weak and the periphery accepts the conditions attached to such support. The political will behind this grand bargain is strong. It has survived changes in government in all peripheral crisis countries. The positive results are starting to show in strong exports and the recent rebound in business confidence in the periphery.
But the process is painful. Most peripheral economies are still stuck in serious adjustment recessions. Austerity fatigue in the periphery and potential donor fatigue in the core could put the progress at grave risk.
So far, the political glue holding the Eurozone together still looks remarkably strong. Take the three key examples from this week.
First Portugal: The political crisis is not over yet. But chances are rising that the coalition government will hold together although the leader of the smaller coalition partner had resigned on Tuesday in protest against austerity policies. Having had a chance to consider the alternative, Portugal’s political leaders have apparently decided to stay the course.
Second Greece. Newspaper reports suggest that the troika and the Greek government are close to striking a deal on dismissals in the public sector. De facto, the troika seems ready to accept that Greece will dismiss fewer people than initially demanded, but shift public sector workers from positions where they are barely needed into more useful jobs within the public sector. That is progress. It shows that even the troika has got the message: Greece is very much on the right track. But forcing the Greek government to deliver 100% perfection rather than 90% progress could put all at risk. Maybe the troika got a hint from Berlin to ease up a little? Top German politicians, from Merkel to Schäuble and foreign minister Westerwelle, have gone out of their way in the last few days to praise Greek reform progress.
Third Germany. Opinion polls suggest that the anti-euro protest party is making no headway in the opinion polls, with support stuck around 2.5%. That is half of what they would need to get into parliament. Germany is ready to support its friends in Europe. The nasty professors wanting to eject Germany from Europe (to find a new home on Mars?) are so far making no headway.
The euro crisis remains dangerous. The longer the adjustment recession in the periphery lasts, the graver the risk that the political glue holding the Eurozone together could lose its cohesive power. But so far, the glue remains very strong. Even we euro optimists can only marvel at the strength of the ties that bind the Eurozone together.