It’s Groundhog Day for saving the euro zone
It’s almost June. So why is the euro zone story just about the same as it was in January? It’s a little like the movie Groundhog Day – every day seems to be a repeat of the last, and the story remains the same. But remember: That movie ended. And every day wasn’t the same. Bill Murray made incremental changes – painful ones – until he figured his way out. That’s what the euro zone is doing right now.
Despite all of the elections, the pain, the protests and the German Sturm und Drang, the fundamental basis of the crisis, and the situation, remains the same. Yet this isn’t as bad as it sounds. The actors in the euro zone are very much playing the long game. They’re using the markets both to punish deviations from the outcome they see as the best possible one and to engineer that outcome and help them shape the policies they think will end the crisis for good.
Despite the protests, the overall commitment to the euro zone remains as strong among all of the key players – Berlin and the peripheries – as it was before. That’s hugely important, reflecting that the overall tenor of the conversation has not shifted toward the disintegration of the euro zone, or any individual exits. Indeed, after the long, dragged-out process that’s happened in the markets these last months, the Germans are finally showing the willingness to compromise that we have long expected. They are very gradually moving toward the idea of the ECB increasing the money supply, accepting some inflation, softening the fiscal compact in the zone – moving forward on a whole host of issues, in fact. But with all that movement, they aren’t giving up on the fundamental premise of keeping the euro zone fiscally stable over the long term and recommitting every member nation to budgetary responsibility. That’s why it’s taken so long to get from there to here.
Indeed, Angela Merkel is not just talking austerity, she’s talking growth. The whole continent is obviously happy to hear it, but she really hasn’t changed her message that the zone must spend within its means – she’s simply layered the growth message on top of it.
In short, it looks like the euro zone continues to be on the right path. It’s a rocky path, fraught with challenges, and it may not be a particularly fun one, but let’s not forget the size of the hole that the euro zone nations dug for themselves – trillions in unfunded liabilities, if things were to continue on the gilded path of the late 1990s and 2000s. No matter what, this was never going to be an easy fix.
However, one hopes the message is getting across. Take the recent Greek elections – they were a disaster. People voted with anger and foresaw no real consequences to their decisions. Turnout was depressed, with the New Democrats and the PASOK socialist party seeing big losses. But there will be a new set of elections on June 17, with real consequences this time. There are only so many electoral do-overs the Greeks will get. The smaller parties will have to compromise on their principles and old alliances if they want to protect the pensions of the voters. They will have to band together to keep the hard-left party, Syriza, from torpedoing the terms of the latest bailout.
Germany will play these elections wisely, which is to say, it will continue to push hard on austerity and budget responsibility with the Greeks until the elections are over. Then it will take in the results and move into compromise mode, wherever in the terms of the Greek deal it makes the most sense to do so. The Germans will push the Greeks to vote responsibly, but short of a full rejection of the euro, they’ll find a way to work with the coalition that comes to power after the vote.
All of this is relatively good news in Europe. In fact, the one discordant note here is coming out of the United States. At the recent G-8 conference, President Obama came out against this incremental approach, saying a big bite would be better. But there’s the rub: If a big bite had been taken, nothing would be changing. The same free-spending parties would be in power, with no consequences for their actions. It sounds a little like Obama’s pining for a second act of the Wall Street bailout, in fact. And we can now see, thanks to JPMorgan, how well that has worked. Obama’s calculation is that, to get more stimulus approved domestically, he could point to a euro zone stimulus as a sign it’s the right way to go. But the reality is, sovereign leaders have to be willing to let the markets cause some pain. It’s the only way things change. Obama has no interest in pain right now. But in the case of the euro zone, the markets are the right mechanism, if the currency union is to be saved.
This essay is based on a transcribed interview with Bremmer.