Following the grim market response to European Central Bank President Mario Draghi’s latest monetary policy pronouncements, Europe is approaching another make-or-break moment comparable to the crisis of 2012. The summer quarter ended this week, and financial markets delivered their judgment on just how bad things are, pushing the euro down to its lowest level since September 2012. Europe’s quarterly stock market performance was the worst since the nadir of the euro crisis. The question is whether the miserable summer will give way to a milder autumn. Or whether the summer squalls will turn into a catastrophic tempest.
Confidence in the global economy is steadily improving, as shown in the financial markets’ bullish behavior and confident comments from companies and policymakers over the past few weeks. Though these columns have argued in favor of a robust recovery, when investors get uniformly bullish, the pessimistic case deserves attention.
At last, the European Central Bank seems ready to inject some adrenalin into the moribund euro zone economy. After last week’s news conference, when European Central Bank President Mario Draghi strongly hinted that action would take place after the June 5 council meeting, there have been a host of interviews and leaks specifically describing the new ideas the bank has in mind.
Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.
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.
The North Atlantic hurricane season runs from mid-August to October, with a strong peak in storm activity around the middle of September. A less familiar but even more destructive pattern of disturbances is the financial hurricane season, which coincides with the meteorological one almost to the day.
Whatever happens in the election and the euro crisis, the autumn of 2012 may go down in history as a pivotal moment of the early 21st century – a political season that may even be more transformational than the financial upheavals that started with the bankruptcy of Lehman Brothers four years ago. Paul Ryan’s nomination to the Republican ticket means American voters will feel forced to make a radical choice between two very different visions of the government and the market, in fact of the whole structure of politics and economics in a modern capitalist state. The choice facing Europe in the next few months – starting on September 12 with the Dutch elections and the German court decision on European bailouts – is in some ways even more dramatic: It is not just about the role of government, but about the very existence of the nation-state.
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!
As financial markets slide toward disaster, scarcely pausing to celebrate the “success” of the Greek election or the deal to recapitalize Spanish banks, the euro project is finally revealing its fatal flaw. One country poses an existential threat to Europe – and it is not Greece, Italy or Spain. Every serious proposal to resolve the euro crisis since 2009 – haircuts for bank bondholders, more realistic fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank – has been vetoed by Germany, and this pattern looks likely to be repeated next week.