Here is a crucial footnote to all the soul-searching in Washington this weekend about what befuddled economists still don’t know about the global financial meltdown. This footnote ignores the overarching macroeconomic and statistical quarrels at the spring meeting of the World Bank and International Monetary Fund and examines instead the conspicuous gulf between the American and the European conventional wisdom about the euro crisis.
In a recent presentation in Berlin, Liaquat Ahamed—investment banker and author of the 2009 bestseller about the four central bankers who “broke the world” during the 1930s depression—flagged the major differences between mainstream economists on the opposite seaboards of the Atlantic. Those in the United States are convinced that their “bazooka” of massive aid for failing banks in 2008 and 2009 did a much better job of stopping financial disaster in their country than the Europeans have done with their too-little-too-late rescues dribbled out in the three agonizing years since then. For proof, they point to IMF forecasts of between 1.5 and 2 per cent growth in 2013 for the United States as against a decline of 0.3 percent for the eurozone.
The Americans are further persuaded that rational economic analysis at this stage suggests the common currency of 17 sovereign European countries—with no matching common fiscal policy—cannot survive the crisis that blindsided this bold 21st-century experiment. And many accuse the “Austerians” like the Germans of mercilessly forcing austerity on already fragile economies and strangling the very growth they need to recover. As an editorial in The New York Times put it recently, “this bitter medicine is killing the patient.”
By contrast, the dominant European policymakers in Berlin think they have muddled through reasonably well so far, and that what is needed now is steel nerves to keep the course. From the beginning, they have seen the European Monetary Union not as some technical tool, but rather as an indispensable part of the whole project of integrating European nations that are too tiny alone to protect their interests in today’s globalized world. They have become accustomed to patching up the imperfect airplane in mid-flight as the sovereign debt crisis morphed into bank solvency crises that in return aggravated sovereign debt and triggered market attacks on bond issues of the EU’s small peripheral members, then threatened even the third- and second-largest eurozone economies in Italy and France.
Ahamed’s host on stage in Berlin, Wolfgang Ischinger—maestro of the premier Munich Security Conference and former German ambassador to the United States and Britain—presented this alternative European interpretation ofevents. In this view, the determination of German Chancellor Angela Merkel (once she decided that “if the euro fails, Europe fails”) and of European Central Bank President Mario Draghi (who declared last summer that the ECB would rescue the euro, “whatever it takes”) was the equivalent of Washington’s initial bazooka.
The ECB began buying up bonds of heavily indebted euro zone states and forced the yields down to manageable levels. Merkel led quietly from behind Draghi, without lending her name specifically to his action or mounting any public campaign to win over the German taxpayers who would foot a third of the bill for any losses incurred. The volatile markets calmed down. Berlin shifted its prime worry from the euro crisis itself to the risk of complacency by governments that might think the crisis over and postpone drastic but crucial reforms.
As the eurogroup proceeded with bailing out Greece, Ireland, Portugal, Spain, and Cyprus, the Germans not only took the first steps toward a uniform banking union and regulation, but also began injecting the missing fiscal commonality into monetary union by conditionality for rescue that required recipients to commit themselves to monitored austerity and economic structural reforms. As a bonus in the case of Cyprus, the eurogroup even closed down (messily) the tax haven and alleged money laundering on the island and thereby put other European Union tax havens on notice that their days are numbered.
With a political sleight of hand, Merkel moved progressively from opposing any euro zone bailouts—and being confronted as late as last year by disgruntled taxpayers, half of whom wanted their good old 20th-century Deutschmark back—to underwriting the bailout of five indigent states. Yet this month 69 percent of German voters told Forsa/Handelsblatt pollsters they want to keep the euro.
Now that Berlin has made its institutional point, it is in fact softening its rigid insistence on austerity and is agreeing to stretch out already agreed debt repayments to longer terms.
On Friday, Chancellor Merkel summed up her view—and therefore Europe’s view—of success so far. She told the Bild newspaper that Europeans have “succeeded in making it clear to national and international investors how important the euro is to us and how serious we are about this symbol of political unity in Europe. This has stabilized the euro in recent months, although I am not yet satisfied. … [A]ll southern European states have more or less introduced the reforms necessary for them to return to a sound path. These reforms demand painful cuts, and I know that many people are suffering. But the basic fact is that in the long run a country can only live from the growth it generates. Every country needs a competitive economy and an industrial basis, whether large or small. It must be clear to everyone that debt-funded prosperity is no longer possible.”
To German voters—whatever American economists may think—Angela Merkel’s record on the euro looks good as she opens her campaign for the September election.
Elizabeth Pond is a Berlin-based journalist and author.
World Policy Journal
© Elizabeth Pond