June 19 (Bloomberg) -- Now that Greek voters have done the right thing, it’s Angela Merkel’s turn to tell the German electorate a few home truths about the euro.
Sunday’s narrow victory for pro-bailout parties in Greece offers heartening proof that voters can reject comforting delusions -- such as the defeated Syriza party’s idea that Greece could renege on its bailout terms and stay in the euro -- provided that politicians take a clear stand to explain reality, warts and all.
The election won no more than breathing space for Greece. The victory for the conservative party, New Democracy, won’t fix the euro’s flaws or make it any more realistic for Greece to bounce back from recession if the letter and timetable of its austerity package stay unchanged. Markets think Greece might still crash out of the euro, with contagion to follow: The blink-and-you-missed-it duration of the rallies in Spanish and Italian bond markets Monday morning made that much clear.
Still, something potentially important has changed. It will be clear that any decision for Greece to default and leave the euro will be made not just by recalcitrant Greeks, but also by creditors, in particular Germany, who refuse to make the program feasible. So if -- and that’s a significant “if” -- Merkel and her Christian Democratic Union want to keep the euro area intact, they’ll have to make decisions they’ve resisted, and for which they’ll pay a price at the ballot box.
Greece will now need more money, much of it German, if its new government is to last more than a few months. Last month’s indecisive election cost Greece time from its austerity program, and when it comes to bailouts, time is money. The economy froze solid as banks leached deposits and taxpayers withheld payments, fearing a return to the drachma. Germany’s leaders bristle at any mention of renegotiating Greek bailout terms, but that’s what’s required whatever name is given to it. At a minimum, the agreement’s timetable will need to be lengthened to provide more time for budget cuts.
At the same time, Merkel should -- as she did on Monday -- insist that Greece’s government is held to essential supply-side reforms, such as improving tax collection, breaking down anti-competitive protections around industries, reducing unnecessary regulatory burdens on businesses, and making the public sector slimmer and more efficient.
Greece remains the euro area’s smaller problem, but the positive outcome of the election is a great opportunity for Europe to make a wider change of course. To make Spanish and Italian borrowing costs sustainable, Merkel will need to agree to some form of mutualization of debt and a larger firewall, as Bloomberg View has argued repeatedly during this debt crisis.
In ordinary times, all this would be unrealistic to ask of any politician, because Germans don’t want to spend more on rescuing less efficient economies. These times, however, aren’t ordinary. Merkel can reduce the political cost that a shift of strategy would entail by starting to tell the whole truth to her voters, rather than her usual parable of profligate Mediterraneans versus self-sacrificing Germans.
Merkel’s new message should include an acknowledgement that as Bloomberg View showed before, Germany has been bailed out by European taxpayers, too -- to the tune of as much as 466 billion euros ($590 billion). She should admit that Germany was among the first countries to break the fiscal rules of the euro, ensuring that others would also break them. She should say German borrowing costs have benefited from the crisis: As investors fled Greece, Italy and Spain, they took refuge in German bonds, driving down yields. Before the collapse of in 2008, German 10-year bonds yielded about 4 percent; today, Germany pays 1.4 percent.
Finally, Merkel should explain that the euro helped Germany increase its exports, in part because Greeks, Italians and Spaniards were borrowing to buy German goods. German exporters made money by selling more to the profligate Mediterraneans; German banks made money by financing those sales; and German workers got jobs they wouldn’t otherwise have had.
None of this should take away from Germany’s achievements in undertaking reforms that drove down relative wages and made the nation competitive again -- pain that countries such as Greece refused to undergo at the time. But Germans need to be told about the euro’s yin as well as its yang. Otherwise they may unwittingly destroy many gains the euro gave them and badly weaken the EU’s political fabric, which Germany did more than any other nation to create.
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