January 5, 2015

The new year brings a fresh political crisis in Greece, with its unexpected election. Nonetheless, Europe has a serious chance to build the greater cohesion in its monetary union that can help avoid future crises and work toward better economic growth in the world’s second-largest economy.

Greece’s new travails may encourage France and Italy to delay their own much-needed economic reforms—and that would not be good, as those reforms are central to building the euro’s long-term credibility. Still, 2015 is not 2008. Today most Eurozone governments have joined a German-led consensus in favor of austerity, and know that the credibility of Europe’s currency requires a steady course. As 2015 begins, here’s the news, good and bad, for the euro.

Good News I: Lithuania on January 1 became the nineteenth member of the currency bloc. Lithuania and its Baltic neighbors, Estonia and Latvia, have worked hard to join the European Union's most elite club, and they will reinforce those Eurozone members who believe in the necessity of reform and budgetary discipline. Lithuania also will reinforce those who see the euro as a political imperative, and not just a mere currency. To join the eurozone is to move to the center of Europe and an opportunity to enhance national security.

Good News II: The European periphery, which in 2008-2010 had been in tatters, is returning to growth, albeit weak growth with persistently high unemployment. Portugal and Spain are expected to have growth between 1-2 percent in 2015, while Ireland may reach over 3 percent. These countries still face enormous economic challenges, but no longer are we waiting for their economies to fail.

Bad News I: Greece has plunged into the uncertainties of an election campaign, with a potential victory by the leftist radical party, Syriza. This came just as Greece was negotiating with the EU and the IMF over the terms for receiving the final tranche of its bailout and a future credit line. In an effort to shore up his position with his country's international lenders, Greek Prime Minister Antonis Samaras called for an early presidential election, presumably believing he could convince parliament to back his candidate. But he grossly misjudged the political environment and after three failed ballots, was forced to call a general election for January 25.

Bad News II: Continuing slow or non-existent growth in the major European economies will hinder recovery. Germany is expected to grow about 1 percent, and there is little or no domestic pressure for a more expansionary policy. The German fear of inflation remains strong, despite warnings that Europe may be heading toward deflation. France and Italy are likely to grow less than 1 percent in 2015--slower than Spain and Portugal—and must undertake serious structural reforms that, in the short term, may threaten even that modest growth.

Good and Bad News: The euro has reached its lowest value against the dollar since 2010, which may reflect US growth rather than European weakness. This will make imports for Eurozone consumers more expensive, and the local price of oil and gas may rise despite a global glut. But German machine tool exports and Italian luxury goods will be cheaper and more attractive in markets around the world.

What does all this mean for the Eurozone in 2015? First, its members will continue to build greater regulatory and policy cohesion. Banking supervision, stress tests, and budget reviews make it less likely that any national government will be able to abuse the single currency, as happened prior to 2008. Instead, European monetary union will begin to have real meaning.

How to Build Euro-Credibility

But if greater monetary integration is to succeed, the Eurozone will need the key ingredient of credibility. To date, that has been provided by a key trade-off. Countries have adhered to Germany's approach of economic reforms and support for austerity, and Berlin has worked to avoid letting them fail.  But with new rules and mechanisms in place and a weakening German economy, that credibility must now have a broader base. This is especially true as the larger economies of Italy and France raise concerns. Both countries have high debt-to-GDP ratios (Italy ranks close to Greece and Portugal, and above Spain). France has delayed the date for reaching its budget target. Both governments have indicated their willingness to reform their economies, and Italian Prime Minister Matteo Renzi has made some progress. But strong pressure from all the other Eurozone governments will be required if these two governments are to overcome domestic opposition. There will be a continuing debate about austerity versus more flexible economic policies. Still, governments will focus increasingly on balancing budgets and reducing debt. To stimulate growth, they will turn to EU-level mechanisms, such as European Commission President Juncker's proposed investment plan.

Greece is now a sideshow. Syriza may not win the election. Its poll numbers have been dropping and voters are likely to treat a national election more seriously than they did the European Parliament elections in May, which Syriza won in Greece. But any Greek government, whether Syriza or not, that argues for abandoning—or even just relaxing—the painfully negotiated bailout will find little sympathy elsewhere in Europe.

There is also much less fear now that a Greek exit from the euro will have serious consequences for the currency. In fact, the example of a Greek government forced to exit the euro because it would not play by the agreed rules could provide exactly the strong credibility the Eurozone needs just now. It would certainly focus minds in Rome and Paris on what those countries must do to avoid a similar fate.

Thus, 2015 is likely to be a year of slow growth in Europe, with the priority placed on consolidation of the rules that will bring the Eurozone countries ever closer together. Greece may stumble anew into crisis, but is unlikely to drag the Eurozone with it.

Frances G. Burwell is Atlantic Council vice president and director of the Council’s Program on Transatlantic Relations.