The Economist warns:
Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years. Its leaders have squandered two years of respite, granted by the pledge of Mario Draghi, the European Central Bank’s president, to do “whatever it takes” to save the single currency. The French and the Italians have dodged structural reforms, while the Germans have insisted on too much austerity. Prices are falling in eight European countries. The zone’s overall inflation rate has slipped to 0.3% and may well go into outright decline next year. A region that makes up almost a fifth of world output is marching towards stagnation and deflation.
Matt O’Brien suspects “there will probably be another grand bargain”:
The first one said that, if need be, the ECB would buy a country’s bonds in unlimited amounts to keep their borrowing costs low, as long as they did austerity. That last part is what got the Germans to support it, and they could try the same trick again. This time, they could say the ECB will buy each country’s bonds, in proportion to their economy’s size, as long as they make structural reforms. This is a catch-all phrase that basically means making it easier to fire people. When it’s too hard to do so, as it is in southern Europe, companies are wary about adding full-time workers and only hire young people for part-time ones instead. Germany attributes its own economic success, which is actually pretty overrated, to pushing through these kinds of unpopular changes a decade ago, and it’s obsessed with making the rest of Europe do the same. Maybe so much that it’d be enough for them to let the ECB save the euro again.
But there’s a less sanguine possibility. The ECB could keep not doing enough, Germany could keep blocking them from doing more, and Europe could keep stagnating. It’s their choice.
The Dish 