European leaders met in Brussels yesterday, and even going in it was clear that the countervailing forces, exemplified most by Germany and France, would not come to any agreements. And that’s just how it turned out:
A major rift has opened up between Germany and France for the
first time in 30 months of euro crisis over how to restore confidence
in the single currency.
A special EU summit marking the debut of France’s President François Hollande saw him challenge Germany’s chancellor, Angela Merkel, on the euro, arguing that the pooling of eurozone debt liability – eurobonds – had to be retained as an option for saving the currency. Merkel has ruled out eurobonds as illegal under current EU law.
Hollande told the dinner of 27 leaders that he wanted to see eurobonds established, while conceding that this would take time, witnesses at the talks said.
Merkel responded that this was nigh-on impossible since it would require changes to the German constitution and around 10 separate legal changes, the sources said.
The legal changes are a red herring. Germany’s resistance to eurobonds tells you that they view Spain, Italy and the peripheral countries as a clear default risk. They could just sell their own bonds to finance their own debt, so there’s no other explanation for their resistance. In the case of Greece this is pretty obvious. But this could also be an implicit admission that the euro project itself is doomed, and Germany doesn’t want to go down with the ship. Germany also doesn’t want the European Central Bank to be allowed to deliver funds directly to the European bailout fund, or to recapitalize banks directly. Hollande may have more backers for his position, but Germany really holds the cards.
At any rate, a failure on the part of Germany to go along with even these steps toward integration means that the other steps, like current account transfers, are not on the horizon. Meanwhile, everyone agrees in public that they want Greece to stay in the Eurozone, but they want to continue the austerity agreement that is clearly untenable and will force them out. Amartya Sen is well worth reading on this crisis of European democracy, with Germany leading the peripheral countries to their doom.
The cause of reform, no matter how urgent, is not well served by the unilateral imposition of sudden and savage cuts in public services. Such indiscriminate cutting slashes demand — a counterproductive strategy, given huge unemployment and idle productive enterprises that have been decimated by the lack of market demand. In Greece, one of the countries left behind by productivity increases elsewhere, economic stimulation through monetary policy (currency devaluation) has been precluded by the existence of the European monetary union, while the fiscal package demanded by the Continent’s leaders is severely anti-growth. Economic output in the euro zone continued to decline in the fourth quarter of last year, and the outlook has been so grim that a recent report finding zero growth in the first quarter of this year was widely greeted as good news [...]
Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates — from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound.
Participatory public discussion — the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot — could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum.
We’re basically in a holding pattern until after the new round of Greek elections on June 17. French parliamentary elections will also take place at that time, and they will determine how much of Francois Hollande’s agenda can be implemented if he gets a strong majority.