The Eurocrisis became boring in 2013, didn’t it?

Do you remember 2012? In the spring, Greece bankrupted, subsequently it had parliament elections twice and the whole Europe was afraid of a possible victory of SYRIZA communists or Golden Dawn neo-Nazis. Next, we were saving Spanish banks, and Cyprus and Slovenia were also on the brink of bankruptcy. But in the summer of 2012, the ECB prepared the OMT program of bonds purchasing and the crisis has become quite boring.

However, in March a shock wave of the Cypriot crisis came. Even though many had been speaking about a probable solution, nobody took it seriously until it was too late. The Cypriot finance sector full of checks and balances could not handle the losses following the Greek bankruptcy, and after the ECB interrupted the liquidity flow (the ELA program), the government was forced to bailout banks with their own resources.

The bailout was different this time though. Financial losses were not a burden only on taxpayers’ shoulders, but also for creditors of Cypriot banks, and larger depositors also had to participate. ATMs stopped working, trans-border flows of money froze and the euro currency unofficially split in two: the normal euro and the Cypriot euro.

Even though Europe got over this problem, the continent has been changed. National budgets stopped being interesting. The Fiscal Compact came into force on 1 January. This treaty was supposed to force politicians to behave more responsibly and not to think only in a time horizon of the next elections, but in a couple of months it became obvious that countries would be breaking also this treaty regularly. Budget deficits in most countries are still in the red and public debt is rising. The EU is trapped somewhere between a recession and stagnation and everybody is looking up to German industry, which is like a one-eyed among the blind, as it keeps European economy above water. Despite this, ratings of European bonds have decreased in 2013.

In 2013 the connection between public budgets and fractional-reserve central banking system was revealed. Bigger and bigger share of government bonds ends in the portfolios of local banks or in the ECB, which accepts them as collateral. Thus, budget deficits and growing debt will continue to be a reality until the ECB is not be able to keep the financial system operational.

The recent situation seems to be clear also to European representatives, therefore, in 2013 preparations for the upcoming formation of a banking union continued. After the creation of the first pillar was finalized, the preparation of the second pillar began. While the first pillar is based on common bank supervision, the second one is represented by a common resolution fund and common rules on failed bank handling. In December, the final proposal was concluded and now we are waiting for the final decision. However, three major issues remain unsolved.

Firstly, it is the question of government bond risk weight. A big stress-test of the European banking system is supposed to take place in 2014. Rumor has it that it will be quite a strict test, and if it proves to be so, it will not be possible to evaluate sovereign bonds owned by banks as risk-free. This has been happening until now, but after the Greek bankruptcy, nobody believes in risk-free sovereign bonds anymore and the stress-test would be pointless. On the other hand, if the regulator does not evaluate them as risk-free, it could lead to a destabilization of the recently calm bond markets, especially in the most problematic countries like Spain and Italy.

The second question is related to the first one – what to do with banks which will be identified as undercapitalized? Or better – who is going to pay for the recapitalization? Following the Spanish success, relevant Members will probably be tempted to ask the rest of us for help…

The last question is the most important one. When is all this going to end? The eurozone debt equals 90% of annual GDP and is still growing. Even though optimists expect the annual GDP growth of 1-2%, this would not reverse the tendency of debt growth, neither would it stop it; it would only slow it down. The demographic transition continues as well, and several countries were able to slightly improve their situation only thanks to tax increases, temporary policies, and putting aside necessary capital expenses, all of which are measures that cannot be effective forever. Besides, the economy of the whole region is increasingly burdened with nonsensical regulations, goals, programs, and policies (my favorite one is the regulation of toilet tank volume).

This stagnation can last for months, maybe even years. The year 2014 might be the same as the previous one – full of scrambles on the banking union rules and on question of how much should be paid from the European budget and how much from the national ones. The news might still be full of 0.2% annual GDP growth and budget deficits, which will finally be lower than 3%, but just not this year. Or maybe some bank will fall and initiate a snowball effect, which will change the whole eurozone.

I do not know the future of Europe. But what I know is that personal happiness is not entirely dependent on economic situation; therefore, allow me and the whole INESS to wish you all that is good in 2014.

Translated by Roman Ujbányai 6/1/2014