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Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)
Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)

Germany must lead to solve euro zone crisis Add to ...

A grand bargain is needed to save the euro, a bargain much easier to describe than to execute. And on the euro's stability hangs many prospects for economic growth, including in North America.

What's needed, as the Germans say, is more Europe; that is, further yielding of national sovereignty over fiscal and tax policy. What's also needed, as they do not say, is more Germany; that is, additional and substantial German help for the struggling countries of the euro zone.

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Germans overwhelmingly feel they have contributed enough already. Their narrative-to-self runs that after the euro was created, two things happened.

Germany changed its labour laws and other policies to render its economy more competitive. Simultaneously, other less rigorous countries used low interest rates and the strong euro to go on a borrowing and spending spree, thereby making themselves less competitive. Labour costs from 2000 to 2011 rose about 20 per cent in Germany, 40 per cent in Italy, 50 per cent in Greece and 55 per cent in Spain.

If, continues the narrative, we Germans allow other countries to hitch themselves further to our enviable credit rating and low borrowing rates (1 per cent), as in the form of euro bonds, they wouldn't take hard measures to become more competitive but might just continue with many of their bad ways.

Elements of German morality and perceptions of self-virtue therefore mix with hardheaded self-interest. The German public, by all accounts (including conversations with various German parliamentarians who recently came through Ottawa), opposes any further largesse.

That position was more easily taken before a few Spanish banks began tottering. Greeks had always been a pain in the butt. Their economy was small; their fiscal delinquency legendary; their lying to the European Commission evident; their exit from the union bearable.

But Spain, accounting for 11 per cent of the euro zone's economy, is another matter altogether. Spain got caught up in post-euro frenzy and went on a building boom of public and private investment. Circa 2005-2006, Spain was a sea of cranes. There was more construction in Spain in those years than in Germany and France combined, everything from fast trains to condos and apartments, office buildings and hotels.

The boom crashed with the recession: bad loans, mortgages that could not be paid, shrivelled demand, banking losses. Unemployment is now above 20 per cent; youth unemployment around 50 per cent.

Spain had been, as Poland is now, a marvellous success story for European integration. From dictatorship and autarchy, it became democratic and prosperous. It was also strongly pro-Europe. Now Spain is hurting and hurtling toward a precipice. Spaniards are sending money out of their country; investment is drying up; fiscal austerity is hurting; joblessness is awful.

Not far away, discontent is growing in Italy with the measures already imposed by a technocratic government, while other measures are tied up in parliamentary wrangling. Do not forget France, with its swollen budgetary deficits and its new socialist government determined to spend rather than save.

The euro zone is therefore cleaved between the relatively or very frugal and fiscally stable north (Germany, Finland, Holland and Austria) and the southern cone countries in various states of economic distress.

This situation cannot last within the straitjacket of a common currency. The austerity being demanded of the southern cone countries – without any prospect of renewed growth – will become politically unbearable.

The austerity might turn populations against Germany, since that country will be a scapegoat for having imposed this hardship on them. Given the continent's history, that is not a comfortable position for the Germans. When those kinds of resentments bubble, the euro experiment will be over.

So Germany has to help by being more flexible and sharing its good fortune with countries now struggling. In return, the euro zone needs to integrate much more fiscally, since a monetary union without something approximating a common fiscal policy (as in Canada) cannot endure.

More integration – an exceptionally difficult task – means more influence for the strongest country in Europe, Germany, a country that spent half a century until recent days trying to let others lead but now finds itself thrust into a postwar position it (and other countries) never wanted to play.

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