German Decision on Euro Fund Is Good, But Not Enough
The euro dodged another bullet with today’s by Germany’s constitutional court not to block the creation of a European Stability Mechanism, the latest just-in-time measure by the continent’s leaders to save the currency. That’s good news, but not enough.
Far from being reassured, Chancellor Angela Merkel should take the decision as the starting point for a campaign to explain to Germans why saving the euro is in their best interest. If that doesn’t work, she should call a referendum on Europe.
Had the judges in Karlsruhe refused to allow the fund’s ratification, Europe’s already sick economy could have imploded, dragging down the rest of the world with it. So the ruling came as a huge relief, cheering the equity markets and boosting the euro.
But the case also shows that Germans remain reluctant as a nation to do “whatever it takes,” in the words of European Central Bank President Mario Draghi, to rescue the common currency. That reluctance on the part of the euro area’s main creditor will probably continue to prevent a lasting solution to the debt crisis.
That needs to change, and the spectacle of global markets, governments and central banks awaiting the words of eight Germans dressed in red robes and white bibs helps explain why.
The constitutional court placed a heavy condition on its approval of the ESM’s ratification by Germany. Any action by the fund that would increase German liability, beyond the country’s 190 billion-euro ($245 billion) capital commitment, would now require German parliamentary approval. That’s a high hurdle that Merkel will try to avoid because her party has proved reluctant to make such politically unpopular moves. If the 500 billion-euro fund doesn’t look big enough at any point, that will perpetuate uncertainty in financial markets over whether Europe will do what’s needed to underwrite Greece, Italy, Portugal or Spain.
It’s understandable that Germans want to control a process that could impose unlimited liability on their economy for the mistakes of others. But as we have argued before, a distorted narrative has taken hold in Germany that has led to a failure to understand how Germans benefited from the euro; how their exporting success contributed to southern debt troubles; and how German banks (which by 2009 had lent $704 billion to Greece, Ireland, Italy, Portugal and Spain) gained from the subsequent bailouts.
More worrying for the future is a popular failure to recognize that a euro collapse would probably cost Germans a great deal more than would a full commitment to rescue troubled governments. Bloomberg View has calculated that had a permanent federal transfer system of the kind that exists between states in the U.S. been set up in 2001, the total cost to Germany by 2012 would have been roughly 11 billion euros, or about 0.03 percent of gross domestic product. Of course, that fund doesn’t exist, so the costs of fixing the euro as a result of the current crisis would be much higher -- but again, not as high as the economic collapse that a euro-area breakup might trigger.
Merkel and other German leaders need to start making it clear to citizens why rescuing other economies would be in Germany’s national interest -- a case they have failed to make effectively so far. They have a duty to explain how the euro has expanded markets for German exports in Europe and created jobs at home. They also must tell Germans that those markets would shrivel and the jobs would disappear should the euro break up. Merkel must also tell Germans that, should the euro disintegrate due to Germany’s reluctance to foot the bill, the rancor would inflict lasting damage on the European Union itself.
That’s a vital point, because while Germans are ambivalent about the euro, they remain strong supporters of the EU, a project that brought Germany in from the cold after World War II, generated prosperity and enabled German reunification after the collapse of the Soviet bloc.
There are signs that Merkel and Germany’s elite recognize the risk that the euro crisis will blind Germans to collateral damage on the EU. Last month, a group of German think tanks, backed by the country’s big media groups, started a public-relations campaign called “I want Europe,” devoted to reminding Germans why the EU is still worth protecting. Merkel endorsed the campaign.
By now, the narrative of bad Greeks and virtuous Germans is so ensconced that even a frank and determined message from Merkel might not work. If it doesn’t, she should call a referendum on whether Europe’s largest economy wants to further the EU’s integration in a way that will ensure the euro’s long-term survival. This is something that individual judges on the German constitutional court and Finance Minister Wolfgang Schaeuble have already called for.
A referendum on Europe would delay an end to the prolonged crisis, and it would be risky -- history shows such referendums can be lost, even in pro-European countries such as France, Ireland and the Netherlands. It would require an act of great political courage for Merkel to call one, given that failure could kill her chances of re-election next year.
Yet the risk that the crisis will deepen through the next year on the back of uncertainty presents an equal threat to Merkel’s election prospects. She is more popular than her party precisely because voters think she has handled the euro crisis well, helping Germans to escape largely unscathed so far. If that changes, and the crisis spins out of control, she could lose the election -- and go down as the German chancellor who lost Europe.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.