What's Next for the Eurozone?

Since late 2009, Europe has struggled with a series of debt crises that have threatened the survival of the European monetary union. As recently as the summer of 2015, Greece hovered on the brink of exit from the euro before agreeing to a new bailout. What does the debt deal and willingness of the Greeks to endure more austerity tell us about the future of the Eurozone?

“Greece, although it was an outlier, was not a unique case,” said Stavros Thomadakis YC ’68, emeritus professor of financial economics at the University of Athens, in a recent Yale Insights discussion. “By throwing Greece out, you do not really resolve the problems of Europe or the Eurozone.”

Thomadakis spoke in a conversation moderated by Andrew Metrick, deputy dean and Michael H. Jordan Professor of Finance and Management at Yale SOM, as well as the director of the Yale Program on Financial Stability. The other panelists were Kyriacos Sabatakakis, managing director of South Eastern Europe for Accenture, and Mary Tanner, senior managing director of EVOLUTION Life Sciences Partners, an investment bank that does business in Europe and elsewhere.

The panelists agreed that the Eurozone would survive—but perhaps not in its current form. “It is a fact of history that no currency union has survived long without a fiscal and taxation unity,” Tanner pointed out. Given the difficult choices made by all parties to preserve the Eurozone through the long string of challenges, Sabatakakis believes monetary union will continue but likely with a more coordinated fiscal policy. Change in Europe may be slow, though, because of its layers of linkages—the Eurozone, the European Union itself, and the Schengen Area with free border movement.

Sabatakakis said, “I’ve been impressed by the resilience of the Euro through the peak of the crisis.” The euro’s recent dip is a temporary result of Europe’s quantitative easing, in his view. While the U.S. economy is doing well enough that the Federal Reserve raised benchmark interest rates, the European Central Bank has extended quantitative easing into 2017.

Unemployment, weak lending, and slow growth in Europe have been compounded by uncertainty created by terrorism and a nearly unmanageable flood of refugees. “The whole European experiment was based on free capital movement and free movement of labor,” Thomadakis said. “Both have been challenged now.” With both the financial crisis and the refugee crisis, the bureaucracies of the Eurozone and the EU have proved unwieldy and unable to respond in a timely way—but the unions continue.

Tanner highlighted reasons for optimism. With her focus on technology and life sciences, she sees a region coming out of a period of painful adjustment. Tanner estimated that a worldwide downturn in pharma has meant 800,000 jobs cut. But from that difficult churn, Europe— a region that has long lagged in new company creation—found opportunity. “Now there is a pool of experienced management who can become entrepreneurs.”

For more than three years Tanner has seen a renaissance of venture capital in Europe. And it is starting to bear fruit. “Despite the low-growth world in Europe, last year was the largest number of initial public offerings in biotech companies in nearly a decade,” she said.

Thomadakis, while more cautious, also saw positive signs. “The overall economic picture in Europe is one of stagnation with some green shoots,” he said. “The indications are, on a number of fronts, that we have turned the corner.” Though Greece is struggling more than the rest of Europe, Thomadakis said, the crisis “hit bottom” when the country was on the brink of leaving the Eurozone. Having accepted the terms of the last bailout, the country is moving forward, slowly. He added, “The risks facing Greece now are not macroeconomic because, despite all the noise, Greece is now on fiscal balance.” The biggest issue is geopolitical uncertainty in the surrounding regions, which is feeding the refugee flow into Europe.

Sabatakakis is looking to shipping and tourism, two traditional core engines, to move the Greek economy forward again; he also noted that a domestic tech sector has begun to emerge for the first time. Surprisingly, Greeks work more hours than residents of any other European country. However, “there is a big productivity issue,” Sabatakakis said, which means the country is much less competitive than it should be. But it has an educated population that could build a knowledge economy. He is watching clean tech, agriculture, nanotechnology, pharma, software, and mobile as areas for showing promising development.

“People have realized they want to be able to control their own futures,” he said.