By Martin Wolf
“Marry in haste; repent at leisure.” Full of impetuous ardour, Germany’s partners seduced – some might say blackmailed – the continent’s most powerful economy into sacrificing monetary independence two decades ago. But, as the prince in Giuseppe di Lampedusa’s Leopard remarked of his own indissoluble union: “Fire and flames for a year; ashes for thirty.” Now is the eurozone’s time of ashes.
Heads of government of the group of 20 leading countries who do not come from the eurozone must feel like marriage counsellors trying to reconcile partners far too different in character and values to live happily together.
The careless lending before 2007 aggravated the danger. That carelessness, exacerbated by the notion that the marriage made all equal, has made the crisis far worse.
Those whom borrowing afforded a standard of living above what they could afford are being forced to accept a plunge into poverty. Not surprisingly, they resent the change.
The Greeks, unhappiest of all, have apparently chosen a government of parties slightly less unenthusiastic about the agreed programme than the others. Antonis Samaras was an opportunistic opponent of austerity in opposition, while his party, New Democracy, bears a full share of responsibility for the pre-crisis mismanagement. Much trouble lies ahead: Alexis Tsipras of Syriza, the far-left party, has 27 per cent of the vote already. He will be only too happy to exploit rising public anger.
Spain is hoping for a €100bn bailout of its banks but, alas, one that benefits the creditors of banks at the expense of the creditworthiness of the government. At current rates of interest, it is only a matter of time before Spain requires a fiscal rescue. That would exhaust the available resources of the eurozone. It also risks turning a proud country into a dependency, with frightening results for stability.
Italy’s fiscal deficits are far smaller than Spain’s, but its rollover problem is bigger. According to the International Monetary Fund’s Fiscal Monitor, Italy needs new financing equal to 28.7 per cent of gross domestic product this year, far above Spain’s 20.9 per cent (see chart). Moreover, what follows the government of Mario Monti, due to leave office next year, is an enigma.
To this one must add the divergence of views on economic policy between France and Germany. François Hollande’s parliamentary victory will add to the stress. The coming debate over what a growth strategy means, while necessary, risks becoming quite heated.
Why, then, does anybody imagine that this difficult marriage can endure? One answer is that most citizens of the eurozone wish it to do so. The most powerful, however, is that people are (rightly) terrified of the consequences of a break-up. As time passes, finance is becoming more national. But economies remain highly integrated. Not least, today’s EU has been built around the euro. It cannot be assumed that the integration would survive a break-up. It would certainly represent a violation of treaty commitments.
The marriage may have been foolish. But a divorce would be terrifying. It is against this background that we must assess the views of the dominant partner: Germany. According to a translation I have received from the German embassy, Angela Merkel, Germany’s cautious chancellor, told the Bundestag last week that she wishes to say to “all those who … are intent on persuading Germany that we need eurobonds, stability funds, a European deposit guarantee scheme, many more billions and much more: yes, Germany is strong”. Moreover: “We’re convinced that Europe is our destiny and our future … But we’re also aware that Germany’s strength isn’t infinite.” Furthermore: “Quite apart from the fact that these seemingly simple proposals … are unfeasible in constitutional terms, they are completely counterproductive. They would make mediocrity the yardstick for Europe. We would thus be forced to abandon our goal of maintaining prosperity in the face of international competition.”
To all this she added: “The fiscal compact is a first step towards combining greater unity with greater control at the European level. And it’s going to be vital that national powers only be relinquished when it is clear that this will involve independent supervision of the European institutions.” In sum, she made three crucial points: first, Germany is not about to stump up more money; second, everybody in the eurozone must become like Germany; third, when and only when strong rules and credible controls exist at the European level might Germany accept any further losses of national sovereignty.
These positions raise big questions. Is there time available to impose these new rules and procedures, given the huge internal imbalances, wide divergences in competitiveness and severe fiscal pressures? Moreover, does Germany have any flexibility over positions that are partly prudential, partly constitutional and partly moral? My guess is the answer to these questions is: No.
Yet whatever the answers might be, it is evident that Germany’s approach guarantees continued strong austerity in the vulnerable countries and, in all probability, mediocre growth in the eurozone. That, in turn, ensures the recurrence of political and economic crises, even if the eurozone survives. If the marriage counsellors wonder why they must endure all this, the answer is clear: this time, Germany intends to secure the behaviour it wants from its partners.
I can envisage five outcomes: first, a happy marriage, on Germany’s terms, albeit after a painful period of adjustment; second, a miserable marriage, which endures because a break-up is too costly; third, a degree of mutual accommodation, in which the north becomes more southern and the south more northern; fourth, a partial break-up, with the remaining members moving into one of the three previous categories; and, finally, total break-up. What is certain is that Germany will not get the eurozone it wants easily or swiftly. If partial or total break-up is avoided, the period of difficulty will be long and painful. The crisis of the eurozone is likely to be a very long-running soap opera – if it does not end in tragedy.
Copyright The Financial Times Limited 2012
See online: A bitter fallout from a hasty union