Why the current europhoria will likely fade
Does the German Constitutional Court ruling in favor of a European bailout fund, closely followed by the big win for pro-euro and pro-austerity parties in the Dutch general election, mark the beginning of the end of the euro crisis? Or were these events just a brief diversion on the road toward a euro breakup that began with the Greek government accounting scandals in 2009? Most likely, the answer is neither. This week’s political and legal developments have given European leaders just enough leeway to avoid an immediate collapse of the single currency, but not nearly enough to end the euro crisis.
In this respect, the German Constitutional Court has acted exactly in accord with the powerful speech delivered in Berlin this week by George Soros and published in the New York Review of Books. This accuses German policy of condemning Europe, albeit inadvertently and with the best of intentions, to “a prolonged depression and a permanent division into debtor and creditor countries so dismal that it cannot be tolerated.” Germany does this by always offering “the minimum necessary [support] to hold the euro together,” while blocking “every opportunity to resolve the crisis” once and for all.
From what he calls this tragic record of missed chances, Soros draws a conclusion similar to the one presented in my columns three months ago. Germany can continue as the economic leader of Europe only if it accepts the responsibilities of a “benign hegemon,” much as the U.S. did when it forgave Germany’s debts and launched the Marshall Plan after World War Two. If, on the other hand, Germany continues to identify debt with guilt (the German language, significantly, uses the same the word, schuld, for both concepts), it will continue blocking any resolution of the euro crisis that might involve the sharing of government debts across Europe. If, on top of this opposition to mutualizing debts, Germany retains its taboo against any monetary financing of government deficit, as practiced in the U.S. by the Federal Reserve, then Europe will be condemned to long-term depression and quite possibly a revival of national hatreds. In that case, it would be better for all concerned if Germany left the euro.
Whether Germany can, in practice, be persuaded either to leave the euro – or preferably, to abandon its opposition to mutualizing and monetizing debts – will depend, according to Soros, less on diplomacy and economics than on the pressure of public opposition to austerity in France, Italy and Spain. But unless and until such pressure prevails, the policy of minimalist and moralistic crisis management will continue to determine conditions in Europe – which brings us back to the decision of the German Constitutional Court.
Coming hard on the heels of the bond-buying plan announced by the European Central Bank, the court decision has created relief and even optimism in financial markets about a durable resolution of the euro crisis. But this optimism will probably prove as ephemeral as all the previous outbreaks of europhoria.
The latest effort to resolve the euro crisis is based on the assertion by Mario Draghi, the ECB president, that the euro is “irreversible” and his promise to “do whatever it takes” to prove this. But Draghi’s promise to spend unlimited resources to defend any country threatened by a euro breakup is logically undermined by the conditions that the ECB has attached to its support, largely to satisfy the German moralism about schuld. This has now been reinforced by the constitutional court’s insistence that the European bailout fund must inform the entire Bundestag – and therefore presumably the German public – of the detailed conditions imposed in every support program, as opposed to the present practice of only providing confidential information to a small group of parliamentarians.
Economic arguments can be made both for and against further structural reforms and more fiscal tightening in the debtor countries. But there can be no dispute that imposing politically difficult conditions for ECB support must, by definition, create serious doubt about whether this support will be available when a debtor country’s euro membership is most in peril. This happens precisely when a debtor country’s ability to meet its fiscal targets is called into question, as in the case of Greece today. Thus, far from providing an absolute and unconditional guarantee that the euro is irreversible, Draghi and the German Constitutional Court have done the opposite. They have inadvertently laid out a road map showing how the euro could be broken up by market and political pressure.
The upshot is that every debtor country in Europe is now a sitting duck for currency speculators. Italy, Spain and other debtor countries can expect no support from the ECB until their economies deteriorate to the point where they will submit to ESM (European Stability Mechanism) austerity programs. And once debtor countries do agree to such programs, they will face speculation about the loss of ECB support whenever they appear to be missing their fiscal or reform targets. That in turn will force them either to abandon the euro or to tighten the fiscal screws even further and suffer more deflation. In short, the ECB and the German Constitutional Court have created a doomsday machine that is likely to widen the gap between debtors and creditors in Europe in precisely the way described by Soros.
This grim process seems set to continue until one of two thing happens. Germany could soften its insistence on excessive deflation and instead lead Europe toward a more growth-oriented fiscal and monetary policy similar to the one in the U.S. This could happen after the German election next autumn, though even the German Social Democrats are adopting an increasingly moralistic attitude toward southern Europe’s schuld. The alternative is that the debtor countries will rebel against German economic domination and try to force Germany out of the euro. As Soros succinctly puts it: “Germany must lead or leave.”
PHOTO: President of the German Constitutional Court (Bundesverfassungsgericht) Andreas Vosskuhle (5th L) announces the ruling on the European Stability Mechanism and the fiscal pact at the court in Karlsruhe, September 12, 2012. REUTERS/Kai Pfaffenbach