19 June 2012

Martin Wolf: A bitter fallout from a hasty union

If partial or total break-up is avoided, the period of difficulty will be long and painful, comments Wolf in his FT column. The crisis of the eurozone is likely to be a very long-running soap opera – if it does not end in tragedy.

According to a translation I have received from the German embassy, Angela Merkel, Germany’s cautious chancellor, told the Bundestag last week that she wishes to say to “all those who ... are intent on persuading Germany that we need eurobonds, stability funds, a European deposit guarantee scheme, many more billions and much more: yes, Germany is strong”. Moreover: “We’re convinced that Europe is our destiny and our future ... But we’re also aware that Germany’s strength isn’t infinite.” Furthermore: “Quite apart from the fact that these seemingly simple proposals ... are unfeasible in constitutional terms, they are completely counterproductive. They would make mediocrity the yardstick for Europe. We would thus be forced to abandon our goal of maintaining prosperity in the face of international competition." [1]

To all this she added: “The fiscal compact is a first step towards combining greater unity with greater control at the European level. And it’s going to be vital that national powers only be relinquished when it is clear that this will involve independent supervision of the European institutions.” In sum, she made three crucial points: first, Germany is not about to stump up more money; second, everybody in the eurozone must become like Germany; third, when and only when strong rules and credible controls exist at the European level might Germany accept any further losses of national sovereignty.

These positions raise big questions. Is there time available to impose these new rules and procedures, given the huge internal imbalances, wide divergences in competitiveness and severe fiscal pressures? Moreover, does Germany have any flexibility over positions that are partly prudential, partly constitutional and partly moral? My guess is the answer to these questions is: No.

Yet whatever the answers might be, it is evident that Germany’s approach guarantees continued strong austerity in the vulnerable countries and, in all probability, mediocre growth in the eurozone. That, in turn, ensures the recurrence of political and economic crises, even if the eurozone survives. If the marriage counsellors wonder why they must endure all this, the answer is clear: this time, Germany intends to secure the behaviour it wants from its partners.

I can envisage five outcomes: first, a happy marriage, on Germany’s terms, albeit after a painful period of adjustment; second, a miserable marriage, which endures because a break-up is too costly; third, a degree of mutual accommodation, in which the north becomes more southern and the south more northern; fourth, a partial break-up, with the remaining members moving into one of the three previous categories; and, finally, total break-up. What is certain is that Germany will not get the eurozone it wants easily or swiftly.

Full article (FT subscription required)

Merkel's statement to the Bundestag - German only

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