We have a better sense of the situation in Europe, or at least the game being played by Angela Merkel and the European Central Bank, in tandem. Merkel and the ECB, before acquiescing to any scheme involving Eurobonds or running the printing presses, want to tighten fiscal integration among Eurozone countries, with the attendant loss of national sovereignty and real penalties for breaking fiscal guidelines.
Angela Merkel, Germany’s chancellor, has spelt out her determination to create a legally enforceable “fiscal union” for the eurozone, rejecting “quick fixes” such as the immediate introduction of eurobonds to deal with the debt crisis in Europe.
France and Germany will to seek finalise their proposals for treaty change in the European Union on Monday, she told the German parliament on Friday, insisting that only fundamental reforms to reinforce budget discipline and curb government borrowing would deal with the causes of the crisis.
The 17-nation eurozone was facing not just a debt crisis, but a crisis of confidence, she said in a formal government declaration. “Resolving the sovereign debt crisis is a process, and this process will take years.”
Likening the process to running a marathon, a sombre Ms Merkel said “you can last the whole course if you are aware of the scale of the task from the start”.
The ECB’s Mario Draghi is singing off the same song sheet. Basically, we have a type of shock doctrine in effect. Italy, Greece and the peripheral countries are desperate, and before getting their bailout, they will need to basically hand over the control of their budgets to Germany.
What this all ignores is that budget discipline is about the worst thing you can do right now when the Eurozone is headed into recession. Germany has benefited from the euro, because it has kept their currency artificially low and allowed them to move to export-led growth. But the euro is too high for that strategy to work in Italy or Greece. So there’s no way for growth to flourish there, and certainly not with a large dose of austerity. That will only increase budget deficits. So while this deal of budget-discipline-for-the-bazooka may alleviate the near-term crisis, it doesn’t do a whole lot over the long term, because you’re still missing growth. And the monetary union just doesn’t serve the needs of the peripheral countries on this score. “It is essential we get back to more growth,” Merkel said, but I don’t see how all the countries on the euro can do that at the same time, under the same monetary policy. And Germany is simply too haunted by the ghosts of hyperinflation to ever give the peripheral states what they require.
The other part of this is that getting a treaty change to institute all of this fiscal integration could take years, and there may not be that much time. Merkel recognizes this will take years, but she’s persistently pushing the other countries to come to heel before allowing the steps to alleviate the short-term crisis.
There is a choice for Italy and Greece and the like. They don’t necessarily have to knuckle under. But the currency union has been pitched as essentially too big to fail, so thoughts of exiting the euro have taken a back seat to giving up more sovereignty. Essentially, that game has been played, with technocratic governments installed by the EU in both countries. I think Joe Gagnon gets this right:
Either way, Draghi’s admission of the ultimate deal clarifies the choice before Europe and moves us into what is likely to be the final act of the play. “I think we’re in the endgame here in the next three weeks,” Gagnon says. “Either they don’t deliver what the ECB wants and it all blows up, or they do deliver what the ECB wants, and they all get bailed out.”