Angela Merkel’s Next Road Trip
German Chancellor Angela Merkel deserves to be re-elected this weekend. If she is, as expected, she owes Europe a speech on how she plans to secure the future of the union and its currency, the euro.
This won’t come naturally for “Mutti,” or Mom, as Germans like to call her. She doesn’t do charisma, and she abhors the kind of visionary politics implied by a Big Speech on Europe. Indeed, Merkel is a paradox: Popular at home and a heavyweight among European leaders, she has failed to deliver any major economic reforms during her eight years in office, has no discernible foreign policy, and has blocked the adoption of most measures that would resolve the euro crisis.
If Merkel wins, she will face expectations across Europe to make decisions that will be unpopular at home. Merkel will undoubtedly resist, but she might do better to respond with a speech that lays out a plan to fix the euro’s unfinished architecture.
Europe needs this speech for two reasons. The first is that Merkel’s firefighting policies have managed to keep the euro area together, but at a cost to the European Union; the “ever-closer” integration that has been under way since the 1957 Treaty of Rome is in question. Merkel may be the only person who can credibly restore a sense of direction to the union. The second is that financial markets, investors, Greeks, Spaniards and others need to know that Europe’s most important economy is committed to securing the euro area’s future.
With apologies to the chancellor’s speechwriters (though we’re available), here are some points she should cover.
Germany, to borrow from European Central Bank President Mario Draghi, will do “whatever it takes” to secure the euro -- and other euro-area members must do so, too. All 17 countries must recognize that they have a choice to make: Either pool risk and responsibility or live with a euro perpetually exposed to the risk of breakup.
Merkel should deal first with the responsibility part, her comfort zone. Greece, Spain, Italy and others struggling with oversize debt burdens and trade deficits must press ahead with the reforms required to make their countries competitive. Their progress will determine the speed at which risk is pooled.
To keep moral hazard and potential transfers in check, Europe needs a clear framework for future bailouts, clarifying how investors will be expected to share the cost with taxpayers. Merkel also needs to make the case for a functioning banking union that includes a single supervisor, a single resolution mechanism and the fiscal capacity to make capital injections.
The next step must be debt relief. At least four euro-area governments, with a combined debt of almost 3 trillion euros, have no hope of reducing their debt obligations to less than 60 percent of gross domestic product, the level the EU has defined as prudent. These economies won’t be healthy until that debt burden is relieved and Merkel should make clear this can be done if the countries reform as asked.
Some system of fiscal transfers in times of crisis is essential, and the best mechanism for this in Europe is an unemployment-insurance fund to help those who lose their jobs in a downturn. Merkel cannot commit to creating euro bonds, the ultimate guarantee that the currency will need. But she should make clear that option is open, at the end of the process.
So much for the substance. Where should she deliver it? We propose a road trip: Merkel could take her speech around Europe, spelling out what will be required of each audience and what it has to gain. (How to travel? A bus might fit Merkel’s down-to-earth style.)
In Berlin, for example, she needs to explain why Germany must give up its opposition to collective funding for a banking union. In Athens, Merkel can spell out that pushing forward with stalled privatizations and fully implementing the International Monetary Fund’s bailout requirements is a prerequisite for the reward of debt relief. In Madrid, she can talk about the need to restructure the country’s banks. In Paris, she can focus on the need for labor-market reform.
Merkel has been lucky so far with her incremental approach to Europe’s debt crisis. But events can get quickly and unexpectedly out of control. A permanent solution is necessary, and the next German chancellor is the only person in Europe who can credibly set out a plan to reach it.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.