The crisis is clearly in the end stages. ~J
For two years Germany has had its way in Europe, treating historic nations much as Bismarck treated Bavaria – sovereign only in name.
Mrs Merkel will have to relearn the forgotten art of compromise. Photo: REUTERS/Petr Josek
The French-led counter-attack and rumblings of revolt through every branch of the EU institutions last week have brought this aberrant phase of the eurozone crisis to an abrupt end.
“It’s not for Germany to decide for the rest of Europe,” said François Hollande, soon to be French leader, unless he trips horribly next week. Strong words even for the hustings.
“If I am elected president, there will be a change in Europe’s construction. We’re not just any country: we can change the situation,” he said.
European allies are flocking to his cause from left and right, he claims. Not even Austria supports Germany’s austerity drive any longer.
This then is the birth of a Euroland growth bloc with well over 200m people and a commanding majority vote in the European Council, a defining moment in this saga. Mario Draghi at the European Central Bank is quickly bending to the new political dispensation with calls for a “Growth Compact”. The Commission – liberated at last – is finding ways to “extend deadlines” on fiscal targets. Mr Hollande plans an EU-wide call for renegotiation of Europe’s punitive pact on his first day in the Elysée. For this he was instantly rebuked by Angela Merkel. Pacta Sunt Servanda. “The treaty cannot be renegotiated,” she said, forgetting the Kohl maxim that every German chancellor must bow three times before the Tricoleur.
The unratified treaty can of course be renegotiated, or disappear into the dustbin where such reactionary rubbish belongs. Mrs Merkel cannot push it through the Bundestag in any case without the Social Democrats, who are warming to Mr Hollande.
Mrs Merkel will have to relearn the forgotten art of compromise. Unable to dictate terms, she may struggle to deflect the ruinous implications of monetary union onto other EMU countries for much longer.
It is worth remembering that German taxpayers have not yet bailed out anybody, whatever they may believe. Berlin has rejected all forms of debt pooling, Eurobonds, or fiscal transfers, understandably since full budgetary union would violate Germany’s constitution and eviscerate their democracy.
Chancellor Merkel has agreed only to a “Stability Union”, with greater power to police debtor states. The rescues for Greece, Ireland, and Portugal are loan packages at stiff interest, not grants.
I heard an official from the chamber of industry and trade (DIHK) say with disarming candour that the euro has put Germany in an almost perfect position, even if the single currency was thrust upon a reluctant German nation in the first place – and even if 56pc would prefer a return to the D-Mark now. “Imagine how strong the D-mark would be today and how much higher interest rates would be if we weren’t in the euro.”
This is true. It is also a surreal state of affairs. Germany cannot ride a perpetual trade surplus with Club Med without blowing up the system (which must balance), nor can it hope to escape the inflationary revenge of such a policy mix on its own internal economy. The advantage is a short-term illusion, a trap.
It is remarkable that Berlin has met so little resistance until now in driving through a fiscal treaty that puts all the burden of resolving EMU imbalances on the weaker states, and that almost no country wants; or in enforcing its lethal doctrine of “expansionary fiscal contraction” on economies trapped in debt-deflation; or in toppling elected leaders in Greece and Italy; or in imposing bondholder haircuts in Greece against warnings from the ECB – warnings soon realised as contagion engulfed Ireland, and now threatens to engulf Spain too, with Italy yoked in tandem, and France yoked in turn through trade and debt exposure.
This catalogue of misjudgement was possible only because Nicolas Sarkozy went along at every stage rather than deploy France’s swing power in the EU system to call a halt. He sacrificed all for the illusion of Franco-German parity.
Let me be clear, fiscal tightening is necessary, but not beyond the therapeutic dose of 1pc of GDP in net cuts each year, not combined with a shrinking money supply and a collapse in loan demand, and not imposed before southern Europe reaches “escape velocity”.
The EU’s policy mix ignores a century of economic history and science. The result is an entirely avoidable slide into a double-dip slump across half of Europe, a depression of choice so to speak. As the Spanish foreign minister Jose Manuel Garcia-Margallo said over the weekend, Spain is now in a crisis of “huge proportions”.
Premier Mariano Rajoy had hoped to repeat the turn-around ‘milagro’ of the mid-1990s when Spain came back from the dead to meet the entry terms for EMU, that cruelly Pyrrhic achievement. But it was a booming world then. The peseta had just been devalued, and nobody was questioning the solvency of EU sovereign states. Mr Rajoy must by now see the error of that comparison. Unemployment has risen by 400,000 to 24.4pc since he took office before Christmas.
Note that Standard & Poor’s did not cite lack of fiscal rigour when it cut Spain’s credit rating two notches to BBB+ last week. It blamed “economic contraction”, fragile banks, and the incoherence of EU policies. Will Mr Rajoy really grind his country into collapse with two more years of fiscal squeeze when rating agencies say it will not help anyway?
Neil Mellor from BNY Mellon said the latest blows are pushing Spain “toward a point of no return”. We will find out next at Thursday’s auction whether Spanish banks can absorb much more of their own country’s debt. If not, the crisis will quicken since almost nobody else is buying.
It is obvious what must be done. The contraction policies must be halted immediately. Nominal GDP growth must be restored to its trend line by monetary means. The ECB must be given treaty powers to act as a genuine lender of last resort, able to intervene with sufficient force to take all risk of sovereign default off the table in Spain and Italy.
The Latin Bloc might politely tell Berlin: acquiesce in the new landscape, or expect Latin Europe to take matters into its own hands and bring about the fiscal, monetary, and exchange conditions needed to safeguard its societies – entailing a very nasty shock for German banks and exporters.
No such showdown is about to happen of course. Mr Hollande is an Enarque at heart, easily bidable. He may be fobbed off with a bigger role for the European Investment Bank. Italy’s Mario Monti is a true-believer in the European Project. He wants “targeted investments” to lift short-term demand, not revolution. The EU elites will try to muddle through. If policy is loosened enough, they may just succeed.
Yet the mood has at least changed. The faintly Petaniste era of Merkozy is over. “There will be no more talk of a virtuous North and a sinner South. There will be a Europe of countries with their history and character, each with their strengths and weaknesses,” said Hollande ally Arnaud Montebourg.
As for Germany, we will find out what its pro-European rhetoric means when it no longer calls the shots. Or put another way, the epicentre of Europe’s political crisis may soon be Germany itself.
- Hollande and Merkel clash looms over eurozone austerity (guardian.co.uk)
- EU austerity pact: Franco-German conflict | Editorial (guardian.co.uk)