Merkel Warns Crisis Will Last

Merkel’s modus vivendi has always been to go slowly, to wear her opposition out, and to wait. This strategy, which enabled her to become Chancellor, will be her undoing.  The markets don’t wait.  Treaty reform and even the idea of deeper fiscal union are sideshows to the real event.  Unless Merkel agrees to the ECB becoming lender of last resort fast, the eurozone as a whole could suffer immeasurable damage.

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Merkel Warns Solution to Europe’s Crisis Will Take Years (Washington Post 12/2/11)

Europe’s Leaders Pursue New Pact

Agreement on a fiscal pact that brings deeper economic integration by making budget discipline legally binding and enforceable by European authorities is a welcome move, so long as the European Central Bank takes the next move: to become a lender of last resort. But even it were to do so, and in so doing solve the debt crisis, there are two other major issues confronting the EU.
First, hiding behind the debt crisis is a growth crisis. The fiscal pact, which mandates radical deficit reductions for all member-states and across-the-board cuts for the Southern European, does nothing to solve this second crisis.

Second, technocratic surveillance of national budgets based on automatic mechanisms agreed intergovernmentally by member-state governments, without public or parliamentary debate at EU or national levels, is a recipe for disaster. Not only does it close off the possibility of new ideas to bubble up through debate, it disenfranchises EU citizens.

While mainstream leaders may not see a problem with this—since they are the ones agreeing to the pact—the extremes on the right and the left will have a heyday with this. Let us just hope that the debt crisis resolves itself quickly, and that growth picks up again soon. If not, scenarios reminiscent of the 1930s come to mind.

Link:

Europe’s Leaders Pursue New Pact, Deal Would Bring Closer Fiscal Ties (Wall Street Journal 11/28/11)

A Comment on Events in Italy

Finally, Italy has a chance to get out of the impasse, and the morass, that it has been in under Berlusconi. Elected in 2008 with the large majority needed to produce the major structural reforms needed for an economy in decline, Berlusconi did nothing—which was a replay of his previous term in office. If President Napolitano were to get Berlusconi’s resignation and put in his place a ‘technical government’ to oversee the economy while new elections are prepared, chances are that Italy will be able to pull itself out of the mess it is in, by calming the markets as it finally begins to reform.

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Berlusconi Loses Governing Majority (Wall Street Journal 11/9/11)

European Debt Crisis: Euro Deal

There is a French sign at all railway stations: Caution—one train hides another. The problem for the Eurozone is that even if the action this Wednesday resolves the sovereign debt crisis, there will still be the competitiveness crisis. The austerity measures taken across Europe are for the moment at least largely anti-growth. Unless the EU, and in particular the eurozone countries, find ways to promote growth as they pay down debts and reduce deficits, this second hidden crisis will loom even larger than the first.

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Euro deal leaves much to do on rescue fund, Greek debt (Wall Street Journal 10/27/11)

G-20 Opens amid Euro-debt Crisis

As the eurozone crisis rolls on, with world finance ministers urging swift action, eurozone countries seemingly dither.  But there may be method behind the madness.  The banks need to be in the best shape possible before a likely restructuring of Greek debt.   Moreover, the eurozone countries themselves need to work behind the scenes politically both with one another, to agree on the compromises necessary for deeper economic and fiscal integration, and in their own countries, to ensure that they have the support of their own governing coalitions.  The danger with the dithering is not only that the markets will lose patience but that national publics will grow increasingly negative about the bailouts and loan guarantees.  In Southern Europe, public opposition comes more from the left, as citizens question the punitive austerity measures that seem to dampen any possibility of growth and, therefore, the paying off of debts even as they cut into welfare entitlements and public services.  In Northern Europe and Slovakia, the opposition comes more from the right, as citizens question why their savings should go to pay for ‘profligate’ Southerners.  The problem, then, is that EU leaders need not only to come agreement among themselves quickly but that that agreement has to satisfy both global markets and national citizens.  A tall order indeed.

Links:

G-20 finance leaders gather in Paris in crisis mode (Washington Post 10/14/11)

Germany, France Hail Debt Progress (Wall Street Journal 10/15/11)