At the height of the Cold War, in 1963, John F. Kennedy went to West Berlin and famously told an audience of 450,000: “ Ich bin ein Berliner” – I am a Berliner. The speech underlined American support for West Germany shortly after the Berlin Wall cut the city in half.
Today, as the euro zone teeters on the edge of destruction, the new rallying cry could be: “ Wir sind alle Deutsche” – We are all Germans. Germany, and perhaps Germany alone, can save the euro zone. But how?
Slowly but surely, the shape of the new Europe is coming into focus and may be unveiled at the Dec. 9 leaders summit in Brussels. Details are lacking, but you could call this new vision the “United States of Germany” – fiscal union or bust. The great melding would be essentially dictated by Germany, the euro zone’s paymaster, and would see debt-choked countries like Greece and Italy stripped of their budget sovereignty for the sake of the world’s biggest currency and trading union.
Vassal states are coming and this is probably a good thing since the three bailed-out countries – Greece, Ireland, Portugal – proved wholly incapable of managing their economies and finances; two other runaway debt trains, Italy and Spain, were not much better. The price of saving either of them, let alone both, is probably unaffordable. Until they are stabilized, there are no assurances the euro will survive.
The great flaw in the German-inspired plan for fiscal unity is that achieving it will take time, and time is the one commodity in exceedingly short supply as the euro zone’s Titanic thrashes toward the debt iceberg. To survive, the euro zone needs both immediate and long-term solutions. Germany’s proposals are sensible on the latter but wholly inadequate on the former.
On Friday, German Chancellor Angela Merkel used a speech before parliament to call for a “fiscal union” that will require European Union treaty changes. Future budget rules must be legally enforceable through the European Court of Justice and sanctions for transgressors should be automatic. “Resolving the sovereign debt crisis is a process, and this process will take years,” she said, adding that “Europe is in the middle of its greatest test.”
Her unity drive is hardly controversial. The long-term goal of the euro zone was always to match monetary union with fiscal union; it’s just going to happen a lot faster now and under Germany’s terms. “Chancellor Merkel, in the end, is obligated to dictate the rules,” Romano Prodi, former Italian prime minister and ex-president of the European Commission, told Germany’s Spiegel Online. “Germany has to take a decision for Europe, or the game is over.”
Indeed. But the game may still be over for the simple reason that the crisis is clear and present and Ms. Merkel has rejected what she called “quick fixes.” They would include the launch of euro bonds or allowing the European Central Bank to become the lender of last resort to clapped-out governments.
It’s hard to tell whether her stance against euro bonds and freeing up the ECB is political mood music designed to sooth debt-fearing Germans, most of whom think that the wrecked countries have the obligation to fix themselves, not beg for handouts, or is real and unmovable. If Germany refuses to bend, it could be lights out for the euro.
A fiscal union makes little sense without euro bonds, which would make all governments jointly liable for debts. In effect, it would allow the weak countries to exploit the triple-A credit rating of Germany and its smaller, wealthy peers in Northern Europe. The bonds would involve an implicit fiscal transfer in that German bond yields would go up somewhat so that yields of the weakest countries could go down. The problem is that euro bonds would almost certainly require a EU treaty change, and, again, that requires time.
Which leaves the ECB, the one institution that works in the euro zone. The ECB has been buying distressed bonds, but its purchases have been on the wane as Germany makes it clear that it doesn’t want the bank to blend fiscal and monetary policy. If the edge is to be taken off the debt crisis, the ECB’s purchase would have to become far more aggressive. Or it could announce a cap on yields or launch a quantitative easing program.
Ms. Merkel wants none of this but the betting is that she will have to bend, a stance that would reflect her consensus-building, seize-the-middle-ground style. But you can bet she would exact more commitments from the highly indebted countries. That, of course, means more austerity – spending cuts, firings, tax increases, privatizations.
To be sure, austerity is needed, but the type of austerity imposed on Greece, the first vassal state, has been brutal and counterproductive; its recession deepens by the day and society is breaking down. Deep austerity programs are pushing the EU into recession. More austerity will make the recession worse, which means deficits won’t disappear and debt loads will continue to rise.
The markets have been gripped by a relief rally, based on the assumption that the worst is over and that the Brussels summit will finally produce the grand European plan to snuff out the debt crisis. But if “We are all Germans” means “We are all austerity mad,” the euro zone will still enter a world of pain.