Opinion

Thinking Global

Are the financial markets really Europe’s savior?

Jun 11, 2012 21:23 UTC

If the euro is saved, the much-maligned power of global financial markets will deserve much of the credit.

The conventional wisdom among many on the intellectual left is that unbridled financial players threaten to destroy the European Union, one of history’s noblest, war-ending projects. The truth, however, is something else. To be sure, speculators lack noble motives, and global capital is a blunt instrument that tends to overshoot. But markets are forcing European leaders to fix their fatally flawed monetary union, a union that can only last with deeper economic integration and greater political (and democratic) legitimacy.

Last weekend’s agreement by Spain to accept a bank bailout, based on a European aid package of $125 billion, is a dramatic case in point. Senior Obama administration officials, in a series of urgent conversations with their European counterparts, warned that Spain posed the possibility of a “Lehman moment,” with global reverberations that no one could predict. If European leaders didn’t demonstrate to markets that they would pool their resources to address the banking meltdown of Europe’s fourth-largest economy, the contagion could have spread, what remained of U.S. and global growth could have evaporated, and the European Union itself would have been endangered.

In retrospect, it may have been wiser to build Europe without a common currency, one senior Obama administration official told me, given all the historical and national differences. However, now that the euro is used by 17 countries and has become a global reserve currency, the euro zone can’t be dismantled without unacceptable European and global risk. Thus, U.S. officials had been urging European leaders to settle the Spanish bank crisis before the Greek election next Sunday, June 17, and the G-20 meeting June 18-19, to avoid convening on the brink of financial catastrophe.

In the end, however, it wasn’t President Obama who forced a Spain deal through his lobbying with the top three euro country leaders – Chancellor Angela Merkel, French President François Hollande and Italian President Mario Monti. (Side note: One does wonder whether British Prime Minister David Cameron isn’t beginning to feel left out). Instead, it was the unrelenting pressure of European and global creditors and investors, who were withdrawing in droves from Spain, unsure whether a German-led Europe would provide the financial bazooka required.

In Spain, Germany is villain, not savior

Jun 4, 2012 20:30 UTC

MADRID – What brought me to Spain during the most threatening week of the country’s recent history was an invitation to speak about one of Europe’s darkest hours a half-century ago, pegged to the Spanish-language publication of my book Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth.

One of Spain’s most senior government officials was quick to make the connection between 1961, when Germany’s postwar division was deepened by the Berlin Wall, and the historic moment today, when a reunified Germany, acting from its most powerful European perch since the Third Reich, will determine whether the continent will be newly divided – this time along North-South lines, with Spain outside the euro. But more sharply, this official – who won’t speak for attribution as he must deal daily with German counterparts – believes Germany’s actions (and, more frequently inactions) have put the euro and the European Union project itself at risk.

It is in that context, he said, that Spain has put forward an urgent plan for a European banking union, complete with a pan-European deposit guarantee fund and banking supervisor. The idea has now been endorsed by the European Commission, European Central Bank President Mario Draghi, Italy, Ireland and others. German Chancellor Angela Merkel has not followed suit. Spanish officials are lobbying hard for this idea because they believe it’s urgently needed, but also because they hope to force Germany’s hand in a manner that would move markets and reverse Spain’s downward spiral. So that his purpose couldn’t be missed, Spanish Prime Minister Mariano Rajoy over the weekend surprisingly called for centralized control of national budgets in the euro zone – teeing up a crucial auction of Spanish treasury bonds this Thursday.

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