If Germany Doesn’t Bend, Europe May Break
Angela Merkel, speaking to the German parliament at the start of her third term as chancellor, said last week that “Germany will only be strong in the long term if Europe is strong.” If only she were prepared to act on that insight.
The outlook for the euro area is poor -- the European Commission expects growth of just 1.1 percent next year and unemployment to remain above 12 percent -- but confidence seems to be picking up in Germany and some other countries amid tentative signs of recovery. Meanwhile, the situation in Greece (where almost 30 percent of workers are unemployed), Spain (the same) and other weak, heavily indebted economies hasn’t really changed: It’s still beyond bad.
If this divergence between the convalescent and the chronically ill persists, it could threaten the whole union. Fiscal stringency in southern Europe, with only limited monetary stimulus from the European Central Bank to offset it, will keep unemployment unbearably high. Yet as Germany recovers, its main goal is to be firm with the less fortunate. The stress is already undermining the EU and could conceivably break the euro area apart.
Since the global crisis began in 2008, the main question for Europe has been how much to pool fiscal and financial risk. The crash proved that a single-currency area needs strong cooperation on fiscal and financial policy -- especially where the two intersect, as when dealing with failed but systemically important banks. The consensus on this point is solid.
Yet German voters resist, reluctant to make further sacrifices (as they see it) to help the euro area’s struggling periphery. For most of 2013, with elections looming, it was hard for Merkel to challenge them. She no longer has that excuse. After her victory in September, she leads a coalition that commands a huge parliamentary majority. Still, she continues to combine calls for “more Europe” (meaning stronger oversight of southern Europe’s governments) with an insistence on less Europe (meaning little or no new money for mutual fiscal support).
Take Europe’s long-promised plan to form a banking union. A deal reached last week promises a new 55 billion-euro resolution fund, financed by levies on banks. Germany’s finance minister, Wolfgang Schaeuble, seemed to think it a breakthrough.
Hardly. To begin with, the sum is absurdly small: Resolving a single big bank could exhaust it. The fund won’t be in place until 2025, and in the meantime there’s no plan for collective action should it be needed. During the transition period, the fund’s assets will be kept in separate national compartments -- preserving the poisonous link between a failing bank and national insolvency. The procedures for activating the fund, once it’s in place, are convoluted even by EU standards. It’s unclear whether the fund will be able to bolster its resources by borrowing -- one of many crucial details left hanging.
True, the euro area also has a 500 billion-euro bailout fund, called the European Stability Mechanism. In principle, the ESM could be used to recapitalize a failing bank. Again, though, the conditions and complications would be so extreme -- worse than for the new resolution fund -- as to render the idea almost pointless.
The aim should be to reassure financial markets that resolution, if required, will be timely and effective. The new arrangements don’t do that.
EU leaders aren’t even discussing the larger challenge for future fiscal cooperation: the need to move toward a genuine fiscal union, with joint borrowing, a coordinated approach to debt reduction, and the ability to undertake collective fiscal stimulus.
Europe’s struggling economies can’t expect help without strings. What they’re being offered, though, is strings without help. Merkel owes it to Germans to explain how their national interests are inextricable from their continent’s. The European Union will thrive not by consigning its weaker members to long-term stagnation under strict supervision, but by ensuring that all its states advance together.
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