The fawning mission to meet Germany’s demands for fiscal discipline, and lots of it, everywhere, all day and all night, has succeeded. But before you cheer the end of the debt crisis, consider that the Brussels summit chose the wrong bloody mission.
The agenda should have focused instead on short- and medium-term growth plans and didn’t. That’s why the crisis will endure, perhaps not to the point of destruction for the common currency – though that should not be ruled out – but certainly to the point that Europe faces years of zombie economic performance.
The two-day summit, which ended Friday after an all-night negotiating session, wasn’t a total disaster. At least 23 of the 27 countries in the European Union – soon to be 28 with Croatia’s apparently suicidal desire to climb aboard the listing ship – agreed to a new, long-term fiscal pact designed to ensure that the euro never again gets hit with an existential crisis. (Britain isolated itself by refusing to join the deal, for fear that it would have to sacrifice the safeguards on its banking industry.)
On top of that agreement, the EU is strengthening its roster of financial stabilization tools. The EU will lend about €200-billion ($272-billion) to the International Monetary Fund, co-sponsor of the bailouts of Greece, Portugal and Ireland, to boost its firefighting capabilities. The European Stability Mechanism, the permanent bailout fund, is to launch next summer, a year earlier than originally planned, and its lending capacity is to be increased.
Separately, the European Central Bank did its bit on Thursday by dropping interest rates by 0.25 percentage points and opened the credit spigots to keep the banks in the lending game. The ECB will not, however, become the lender of last resort. Nor will Germany back the idea of euro bonds.
In the end, the theme was Teutonic – and legally binding – fiscal discipline, as demanded by German Chancellor Angela Merkel and her debt-fearing minions. Structural deficits are to be limited to 0.5 per cent of GDP. Countries with high debt will have to reduce that debt by one-twentieth a year. Sovereignty-robbing oversights of national budgets are coming, and so on.
Translation: More austerity. Make that more austerity or you get hit with painful sanctions.
The German interpretation of the crisis is that all debt is evil and therefore eliminating debt is the cure. Never mind that countries with groaning debt loads, such as Japan and Italy, have always muddled through, and at times thrived; or that the relatively low debts of Spain and Ireland did not prevent them from becoming victims of this crisis.
And never mind that austerity programs seem to be making a bad situation worse. Look at Greece. Two years of austerity demanded by the EU and the ECB – read: Germany – with the IMF at their side have pushed the country to the verge of failed state status as economic activity vaporizes. The rest of the EU is slipping into recession.
With no growth, budget deficits everywhere refuse to disappear. Debt is going up. Perversely, the German-inspired response to the persistent deficits is demand for even deeper austerity. This is self-defeating, vicious-circle economics. At its worst, the lack of growth will erode the ability of the weakest countries to service their debts. Once investors figure that out, their sovereign bond yields will soar again, to the point their funding costs become unsustainable. Italy is getting close to that point.
The summit failed because scant attention was paid to the far bigger problem of how to restore growth, how to reform economies to make them more competitive and – crucially – whether some of the austerity programs should be diluted, if not eliminated. Or whether Germany should do the unthinkable and stimulate its own economy in an effort to boost imports, all the better to stimulate the weak economies.
As Martin Wolf of the Financial Times pointed out the other day, the “debt crisis” isn’t really about debt. It’s really about epic imbalances within the EU. Germany’s current account surplus is way too big. Greece, Spain, Portugal and Italy are running negative current account balances. The extremes have to be eliminated.
How will this end? Here’s a guess. In the absence of credible growth strategies, and the presence of ever-deeper austerity efforts, the euro zone, at best, will muddle through, though only with the help of the ECB. The bank has ruled out becoming the lender of last resort. Don’t count on it holding to that position. Its bond-buying program will have to accelerate at some point. Euro bonds, ruled out by Germany, will have to be launched. If Germany insists on fiscal austerity, it will have to allow weaker countries to exploit its excellent credit rating.
There is one more scenario that the EU summiteers appear to be forgetting, or ignoring: Social breakdown, Greek style, in other countries as jobs disappear, lost generations take to the streets and banks refuse to lend. Mass protest and strikes, some violent, from London to Athens were regular features of the 2011 disaster calendar. The ultimate outcome of the Great Brussels Fiscal Discipline Summit could be blood in the streets.