Throughout the European debt crises, Germany and its allies in the austerity camp have been urged by financial commentators, particularly in the United Kingdom and the United States, to show more “flexibility” to help the high debt countries in the periphery of the single-currency union.
Such flexibility first took the form of a bailout for Greece when it teetered on the brink of sovereign default in 2010. When that failed to stem the crisis, European leaders were urged to create a bailout fund for in case other nations would find it difficult to borrow on financial markets as well. They did. Ireland and Portugal subsequently tapped into that bailout fund, the European Financial Stability Facility.
When that failed to stem the crisis, the prevailing wisdom became that the bailout fund was too small and only temporary, raising concern about Germany’s willingness to bankroll peripheral eurozone nations in the long term. So Europe’s leaders devised a bigger and permanent bailout fund, the European Stability Mechanism.
Yet the crisis goes on and the new solution floated by commentators is the pooling of sovereign debt in the eurozone in the form of eurobonds. As with the Greek bailout and the erection of the bailout funds, Germany is hesitant. It fears that financial support for troubled eurozone economies removes the incentive on their part to improve their competitiveness relative to stronger European economies which Germany sees as the way to ensure long-term stability in the euro area.
Moreover, there has been growing weariness in core eurozone countries like Germany and the Netherlands to bailing out weaker euro states. The political leaders of these countries can ill afford electorally to advance schemes for further European integration which is increasingly unpopular.
This has been seized upon by those favoring, for instance, eurobonds as prove that their solutions to Europe’s debt woes are perfectly valid. The only reason they aren’t implemented — even if, so far, they usually have been, only maybe not very fast — is that Europe’s leaders are afraid of their voters who stop them from doing what’s right.
It turns out, the proponents of further European integration are quite afraid of the European electorate as well. Writes Martin Wolf, the Financial Times‘ chief economics commentator, in a recent blog post, “I fear that austerity without end will bring about a return to the unstable populist politics the European Union was designed to prevent.”
That could shatter the eurozone and, with it, the EU, thereby ending the most successful attempt to build peace and prosperity in Europe since the fall of the Roman Empire.
Wolf even invokes the rise of Adolf Hitler which he claims had nothing to do with hyperinflation during the Weimar Republic but was entirely due to the economic hardships of the 1930s Depression. “Deep economic collapses are dangerous.”
Indeed they are as they often lead policymakers to experiment with unconventional economic policies because they haven’t the patience to let the market correct itself, which is exactly what should have happened after the credit crunch of 2008. Instead, by repeated government interventions in the private economy, the recession has been prolonged and the sort of creative destruction that has to take place before there can be a true and sustainable recovery, cannot occur.
Notice the panic that arises whenever a single bank is about to go under. Tens of billions of euros are expected to be doled out to Spain soon so the country can save its troubled banks. There can be no failures because the financial industry is so interconnected, it is feared that the collapse of one bank will drag others down with it, resulting in widespread financial panic.
So we have malaise instead until Germany pulls out the “bazooka” and makes clear that it will pay everyone’s bills. That is what Wolf means when he writes that “the creditworthy country has to lend freely if a fixed exchange rate system (or in this case a currency union) is to survive.”
If Chancellor Angela Merkel announces next week that she wants to quadruple the bailout fund, that she’s willing to underwrite every bad loan both German and peripheral banks ever made, will it end the crisis?
Maybe. Or maybe markets will come to their senses soon thereafter and wonder whether the German voters wouldn’t tear up such a commitment in the next election?
Maybe they’ll even realize that it doesn’t matter as long as Greece, Italy and Spain don’t change their ways and implement the sort of regulatory, labor market and entitlement reforms that are needed to move their economies away from clientalism and protectionism toward entrepreneurship and free trade.
Wolf doesn’t seem to particularly care about the longer term imperatives. He ominously writes of “populist politics” unless a short-term solution is found. Without one, he believes, “the eurozone may never reach the long-term.” It’s not so much an argument as it is a threat — integrate now or the “populists” win!
In fact, the push for European integration in spite of the clear wishes of voters in core eurozone countries is exactly what fuels the anti-European sentiment that Wolf despises.
But what’s more concerning is that Wolf apparently seeks deeper European integration for political reasons, not economic ones. Which raises the question, does he want want an even bigger bailout fund, does he want eurobonds and does he want to keep the euro together because it makes economic sense for Germany and the other countries in the euro or because he wants this political project to succeed?
This article also appeared at The Cobden Centre, June 11, 2012.