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.
Merkel Warns Solution to Europe’s Crisis Will Take Years (Washington Post 12/2/11)
Charting the Disastrous Choices Ahead
Markets are reeling because Europe’s leaders have only offered up half-measures to resolve the crisis. Not until Brussels, Paris, and Berlin realize the fundamental flaw in their current approach — a lack of real political and economic integration across the eurozone — will there be an end in sight.
The EU has tried repeatedly, and failed repeatedly, to calm the markets. That is not for a lack of solutions at hand. Consider three: make the European Central Bank (ECB) a lender of last resort, spread exposure by pooling eurozone debt via eurobonds, or massively increase the European Financial Stability Facility (EFSF) and start bailing out weak economies in earnest.
Any of those solutions would reinstate confidence and lead to stability, but each is easier said than done. The first and arguably best solution — in which the ECB simply buys debt without limits from Italy or any other member state in trouble — is legally questionable under the EU treaty; what’s more, Berlin rejects the idea, citing the bank’s limited mandate, and says it could spark inflation. The creation of eurobonds is a political nonstarter for northern European states distrustful of their profligate, crisis-prone counterparts in the south. And eurozone leaders have already tried — unsuccessfully — to create a bigger EFSF on the cheap by asking the BRIC countries to buy in.
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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.
Europe’s Leaders Pursue New Pact, Deal Would Bring Closer Fiscal Ties (Wall Street Journal 11/28/11)
The resignations of Papandreou in Greece and Berlusconi in Italy, replaced by technocratic governments, have raised questions about the democracy of technocracy. These questions only gain in intensity when we add the EU Commission’s increasing powers of surveillance of member states’ national budgets, let alone those of the Troika (IMF, European Central Bank, and EU Commission) when it comes to eurozone member states that have had recourse to loan bailouts (Greece) or to the European Financial Stability Facility (EFSF). The answers to such questions are mixed. Berlusconi’s replacement with a technocratic government—precipitated primarily by global market pressures—may actually be a sign of democracy at work. Papandreou’s replacement—precipitated by the pressures of the eurozone powers and Papandreou’s own ill-advised gamble on ‘direct democracy’—depends upon how things play themselves out. As for the technocratic governance of the EU, this is where the democracy deficit may be greatest.
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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.
Berlusconi Loses Governing Majority (Wall Street Journal 11/9/11)
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.
Euro deal leaves much to do on rescue fund, Greek debt (Wall Street Journal 10/27/11)
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.
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)