Euro zone pain: hurts so good

December 8, 2011

By Ian Bremmer
The opinions expressed are his own.

It seems every Monday morning, the U.S. newspapers greet their readers with the latest news of the euro zone’s painful sovereign debt negotiations, not to mention all the politics, institutions and personalities wrapped therein. The tick-tock accounts of every phone call and meeting are important and fascinating reading, but they’re not as important as the real news coming out of this crisis: Europe is changing — painfully and haltingly, but for the better.

The Continent is moving to a point where increased fiscal coordination will redefine the nature of sovereignty for euro zone member states. Economists have long been saying that it’s going to take an extraordinary amount of pain to right the wrongs of the euro zone’s finances. Europe has already suffered through a lot: liquidity crunches in the banks (see today’s ECB rate drop), recession, riots and technocratic governments taking over the peripheral states. But what must be noted is that Europe would never be where it is today — on the verge of a sounder fiscal path forward — but for all this pain. It has all been necessary, in order to right the course of a euro zone that was, like the U.S., on an unsustainable path.

This may sound like strong medicine, so strong that it may cure the disease but kill the patient, but ask yourself this: Would any of the austerity and return to fiscal sanity have happened in Europe if Germany had simply cut the debtor nations a fat check one and a half years ago, when this crisis came to light? Would the problems of Europe have been solved? The answers to both are, of course, no.

With the latest euro summit meeting about to happen, we’ll likely see a good political story as Angela Merkel and Nicolas Sarkozy smooth over their differences and start to steer the EU ship of state towards a better treaty. But a good political story is not the same as a good market story — the markets, as we know too well, are crueler. They want to see the fat check. They want the problems resolved, even before they start. But nothing changes when a fat check is written, and what the euro zone member states needed much more than a bailout was the type of structural change that is now underway. Markets will have to wait for Angela Merkel to sign on before any bailout happens, and until then, they will continue to inflict pain on the euro zone by cutting credit, playing tug-of-war with bond spreads and complaining, as a JP Morgan analyst recently did, about the “intertemporal dimension” of the crisis.

If it sounds like I’m blaming the markets for riots and political upheaval in the real world, that’s not exactly true either. As I’ve said before, Europe’s path was unsustainable. The markets, after all, had to inflict this pain in response to the perceived collision course.  It’s only through market pain that governments and political institutions will realize they have no choice but to fix their spending habits and resolve the crisis. We should cheer that Merkel hasn’t been bullied into writing a check just yet– because as soon as this crisis is on the road to resolution, the next question will be “could this all happen again?” The re-writing of the EU treaty that Merkel and Sarkozy are proposing is a solid step in making sure that history doesn’t repeat itself — and a step that might not have been taken had the fat check been cut.

In a G-Zero world, the U.S. is no longer the country holding the bailout checkbook, as it did in financial crises in Russia, Latin America, Mexico and Asia over the last two decades. For the first time in modern history, countries and regions are going to have to navigate these crises themselves. Europe is merely the first to go it alone, but others will follow. It’s hugely important that Europe take steps to prevent a crisis like this from happening again, not only for its own viability, but to help draft a new blueprint for the rest of the world. By all accounts, the endless euro zone summit meetings, though frustrating and painful for Europe’s citizens and its bankers, are putting the euro zone on the right path.

This essay is based on a transcribed interview with Bremmer.

France’s President Nicolas Sarkozy (C) sits next to German Chancellor Angela Merkel (L) and European Commission President Jose Manuel Barroso (R) after he delivered his speech at the Conservative European People’s Party (EPP) congress in Marseille, December 8, 2011. REUTERS/Jean-Paul Pelissier


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A Rewrite of the treaty will not happen in our life time. They will have to settle for what they can get from 17 nations. No country in a coherent state of mind would relinquish there budget control to another nation of nations under the current teenage life of the Euro as a hole. Infant and former communist block countries that want to join the currency will also be left on the side lines for at least 2 decades. The Euro economy as we know it today will function but not at the perceived breakneck speed as once envisioned. And if the world stumbles financially so be it, we all need to re-look at our priorities in basic purchase and come down to earth. The world has been living beyond collective means for over a decade and it will stop somewhere.

Posted by Intriped | Report as abusive

well written, ian bremmer, and good to read your analysis

resolving the current eurozone fiscal policy anomalies is a unique situation and provides much for analysis

some have tried to exploit its unknowns for speculative profit or simply to expunge EU institutions

hopefully thomson reuters will see this historic precedent as an opportunity and challenge to test the validity of its own preconceptions and predilections

they cannot continue to serve two masters

Posted by scythe | Report as abusive

The bottom line to the fiscal debacle in the Eurozone was the adoption of the Euro as a common currency. Based on my scant memory of international economics which I studied in the early 1970’s, the individual currencies of the five European countries had to operate within a speciffied snake band. Any deviation within that + or- bank could create a warning to that country deviating within the limits of the band. The individaul country currency was a reflection of the monetary, fiscal policies, gdp etc. The Euro distorted the economic position of each country. A common currency effectivelly meant that the fiscal policy and efficiencies of the Italian economy were the same as those of the German economy. The present Eurozone crises proves that the Euro is not a reflection of of the true efficiencies nor similarieties of each country.
The capital markets may force restrain and austerity on countries like Greece and Italy, but austerity are not going to improve the efficiencies of the markets of these two respective countries. The Emperor Diocletian set forth an Aggresive economomic reform in the 3rd century AD. The Roman people tightened their belts for 250 years..but eventaually the Roman economy collapsed.
Finally the only country that will come out of this crises as a net beneficiary is Germany. German aims in the First World War was the fulfilment of the concept of Mittleuropa in which Germany would be the dominant leader in Europe based on its political, economic and military dominance. It has fulfilled two out of the three goals.
Will European governments submit to the review of their national fiscal markets by some supernational European organization dominated by Germany and France.I do not believe so. The Concert of Europe failed after Napoleon’s defeat. The Eurozone operating under a common currency will fail within 10 years….pure and simple.

Posted by grafspee | Report as abusive

Mr. Bremmer, thanks for this clear analysis.

Indeed, the EU is on the right path and now frontrunner when it comes to tackling government budget deficits.

We and our politicians need to do more and work harder but at least this crisis is not wasted.

Posted by FBreughel1 | Report as abusive

For once this guy is correct. You cant have 17 nations and one currency. You need a central governmental authority and the only way you get that is from consolidation of power. Stop fooling with national pride Europe, set the world standard and create the beginnings of a new world. Create a world government!

Posted by Cranberries | Report as abusive

For once this guy is correct. You cant have 17 nations and one currency. You need a central governmental authority and the only way you get that is from consolidation of power. Stop fooling with national pride Europe, set the world standard and create the beginnings of a new world. Create a world government!

Posted by Cranberries | Report as abusive

Rewriting the treaty so that Germany dominates Europe (whether they want to or not) is not the way to ensure stability. (How soon we forget). Allowing the Eurozone to break up inflicts pain too, but is a more sustainable long-term course.

Posted by Jim1648 | Report as abusive

Funny how often anglo-saxons end up prophesizing and/or wishing the EU or the eurozone to break up. Must be some psychological thing. And here we have a comment that shows the way Mrs. Merkel (with that odd little chap she always takes along) has been going for a long time now: the EU and the euro are going to survive and the framework of treaties will be adjusted. 26-1.

Posted by Beethoven | Report as abusive

I recommend the third comment by grafspee more than the article. The existence of the Euro currency is underlying every facet of what’s wrong with the European Union’s economy. It is a simple mismatch. A currency must reflect (positively or negatively) on a specific government and people’s market position. The Euro doesn’t, can’t, and never will be able to do that for a collection of independent countries. Either the euro must not exist, or the independence of European countries must not exist. Even a casual reader of history couldn’t imagine a scenario where all the countries in the Euro zone forfeit their independence and become parts of a larger federal structure, rather than the mere confederates they are now. Will. Not. Happen. So that means for certain that the euro will be discarded sooner or later. The markets have only truly been waking up to this fact for the last two months. The politicians will indeed be forced to acknowledge the same but only after a horrific amount of time and money has been wasted.

I have but one disagreement with grafspee. Germany has enjoyed an enormous trade surplus do to the Euro. For an outlay of around 76 billion, Germany has in the last ten years gained 1.6 trillion from beneficial trade that wouldn’t have existed with a fairly valued deutschmark. So I don’t see anyway for Germany to come out of the crisis in a better position than they are now, as you predict. Great post, btw. And I almost never say that.

Posted by BajaArizona | Report as abusive