The fundamental problem of the euro is widely seen as one of “herding cats” – the impossibility of coordinating complex policies among 17 discordant nations, each with different interests, traditions and ideas. This is not true. The dividing line in Europe is much simpler. On one side are France, Italy, Spain and every other significant country, backed by the U.S., Britain, the IMF, the European Commission and the leadership of the European Central Bank, proposing serious and complex technical solutions based on genuine fiscal federation, which means the sharing of national debts. On the other side is Germany, occasionally supported by Finland, Austria and Slovakia, always saying Nein!
Every new veto threat from Angela Merkel increases Germany’s embarrassing isolation, as Joschka Fischer, its former foreign minister, recently warned: “Germany destroyed itself – and the European order – twice in the 20th century. It would be tragic and ironic if a restored Germany … brought about the ruin of the European order a third time.” But if Germany’s role as spoiler is increasingly recognized, why don’t the other countries do what this column suggested last week: Tell Merkel to put up or shut up – either abide by majority decisions or leave the euro?
The standard answer is that Germany is the “paymaster” of Europe; so without Germany the euro zone would be “bankrupt”. Such metaphors are a lazy substitute for clear thinking. To see why, compare the consequences of Germany leaving with the Greek exit, which was described as “manageable” by European officials only a few weeks ago. German departure would be less disruptive than Grexit for three reasons.
First , a Greek devaluation would trigger capital flight from the next weakest country – Spain, then Italy and France. Germany would not create such domino effects. Once the Deutschemark was restored and revalued, there would not be a “next strongest” country to attract capital flight. Of course, some people might still send their money from Italy or France to Germany, to speculate on further revaluation, but that would be no different from investment flows out of Europe at present into dollars, pounds or Swiss francs.
Second, and most crucially, the euro zone would become a more credible and coherent unit without Germany. Liberated from German obstruction, the ECB would be able to follow the examples of the U.S., Japanese, British and Swiss central banks, using quantitative easing to bring down interest rates to zero at the short end and to around 2 percent on long-term bonds. Just as important, the euro governments could finally form a genuine fiscal union, using the entire fiscal capacity of the euro zone to back jointly guaranteed eurobonds. The euro zone could then be treated again as a single economic unit, comparable to the U.S., Japan or Britain – and in terms of key fiscal ratios it would score well. Public deficits in euroland ex Germany were 5.3 percent of GDP in 2011, according to the IMF, compared with roughly 9 percent in Britain and 10 percent in the U.S. and Japan. Gross debt (including financial bailouts) was 90.4 percent of GDP, against 98 percent, 103 percent and 205 percent in Britain, the U.S. and Japan, respectively. Trade deficits were much smaller than in Britain or the U.S. In short, euroland without Germany would be far from bankrupt – and the key reason for the euro crisis isn’t lack of competitiveness but Germany’s refusal to mutualize and monetize public debts.