Markets generally believe the eurozone crisis is over. They're wrong, asserts Barry Eichengreen, an economics and political science professor at the University of California, Berkeley.
Many of its EU countries still carry enormous public debt, its banking union is deeply flawed and it faces difficulty increasing exports,
Eichengreen writes in an article for Project Syndicate.
On top of that, the European Union is incapable of acting decisively, says Eichengreen, a former International Monetary Fund senior policy adviser.
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While the eurozone probably won't collapse soon, with all those problems, its outlook is dismal, Eichengreen warns.
Some EU countries have made progress decreasing their labor costs relative to Germany, but that's not enough because they must now compete against China and other emerging markets.
EU nations face challenges increasing exports in light of weak domestic demand and because emerging markets have faltered.
"The ECB [European Central Bank], for its part, continues to do too little to support demand. It has been behind the curve since 2011," he charges.
Fearful of its "political masters," the ECB has refused to use quantitative easing (QE) or any other radical measures. Any QE measures implemented this summer would probably be weak.
Lending for fixed investment is still falling, and the European Banking Authority's latest stress tests don't even consider the possibility of deflation, Eichengreen argues.
"The implication is clear: The banks' capital shortfall will be understated, and the amount of new capital they will be required to raise will be inadequate. If the goal is to restore confidence and get the banking system firing on all cylinders, this is not how to go about it."
Don't expect its banking union to help much either, he says.
The single banking supervisor it creates covers only the largest banks. Its deposit insurance lacks a common deposit insurance fund, and its resolution mechanism for bad banks is underfunded and "incomprehensible and unworkable."
The eurozone's public debt is still 90 percent of GDP. Eurozone officials propose lowering that to their goal of 60 percent during a couple of decades, he notes.
"You read that right. Check back to see how they've done in 2034."
EU bond prices indicate that the markets believe the crisis over, writes
Financial Times columnist John Authers.
That could be a risky bet, he says. With eurozone inflation at a record low 0.7 percent, deflation is a risk. Unemployment remains extremely high in peripheral countries, and EU parliamentary elections next months could bring to power a wave of nationalist and populist politicians, upsetting the political status quo.
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