“Total German triumph as EU minnows subjugated,” The Daily Telegraph headlines a report by Ambrose Evans-Pritchard on Chancellor Angela Merkel’s latest diktat. Whoever wants credit must fulfill our conditions, she declared. Her conditions amount to capitulation by three vulnerable states on core policies, and further erosion of sovereignty for the rest of the eurozone.
For Greece, Evans-Pritchard explains, the terms include a fire-sale of €50bn of national assets within four years—a tenfold increase from what premier George Papandreou thought he signed up to a year ago—and include state holdings in Hellenic Post, Hellenic Railways, Athens Public Gas, the Pireaus port authority, Athens airport, Thessaloniki water, and ATEbank. In return, Chancellor Merkel has agreed to a slight reduction in the penal interest rate on the EU share of Greece’s €110bn loan package and stretch the maturity to 7.5 years; but “[t]his does not restore solvency. Greece’s debt spiral is too far advanced. The debt load will approach 150pc of GDP this year, and debt service costs are 14.4pc of tax revenue.” Coupled with 15% unemployment rate (closer to 40% among the young), the mix is politically explosive.
For Portugal, the condition is more austerity. “Pensions, welfare, and health will be cut, following wage cuts already under way… Fiscal tightening of this magnitude in a country with public-private debt of 330pc of GDP, an over-valued currency, and reliance on fickle foreign financing, is not a happy prospect.” For Ireland, one condition is to give up its 12.5% corporate tax rate. This comes on top of an “exorbitant” 5.8% interest on the EU rescue package—a rate “suffocating for an economy in the grip of core deflation, already reeling from a 22pc contraction in nominal GNP.” Overall, Evans-Pritchard concludes, we are witnessing a new stage of “economic integration on Teutonic terms, but without the prize of shared debt liability”:
Just as eurosceptics always feared, monetary union has led to a state of affairs where—in order to “save the euro” as Mrs Merkel puts it—Europe’s ancient states find themselves having to accept a quantum leap towards political union and a degree of subjugation that would not have been tolerated otherwise. There is no democratic machinery to hold this central system to account since the European Parliament lacks a unifying language or demos, and remains a technical body in practical terms. Raw power is shifting, but to whom exactly? It is as if Merkel has somehow been crowned Magna Mater Europae by the Consilium, behind closed doors.
The British analyst’s summary is accurate. This is not how the experiment with monetary union was supposed to work, however. Back in 1990, the euro was a French idea, the late President François Mitterrand’s condition for his approval of Germany’s reunification. In theory it was supposed to remove exchange-rate risks from the eurozone market, reduce the costs of transactions, stimulate cross-border trade, create an area of monetary stability, and force member countries to practice fiscal responsibility. The unstated intent was to curtail the power of the Deutschmark and to bind reunited Germany more closely to Europe.
A decade ago the scheme worked to the advantage of the periphery. It was possible to obtain loans in Athens, Madrid, and Dublin at interest rates as low as those in Frankfurt. The result was a period of rapid growth in the south and German stagnation. The “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) used the cheap cash not to modernize their economies, however, or to increase their competitiveness, but to finance speculative projects and to indulge in excessive public and private consumption.
In the long run this proved to be an unexpected blessing in disguise for the Germans. Their manufacturers realized that they had to become more efficient and globally competitive. Workers had to endure years of flat wages and high unemployment, but since 2007 Germany’s export-led economy has continued growing in spite of the crisis, and her superior quality products are successfully competing with those of the Asian Tigers. Her budget deficit will drop to zero in 2014, and her budget will likely move into the black thereafter. A conspiracy theorist may argue that the Germans had known all along that the euro would create a captive market for their export juggernaut. The southern periphery could no longer protect its domestic markets by resorting to occasional devaluations vis-à-vis the Deutschmark. At the same time, because of stagnant German wages there has been no offsetting demand north of the Alps for southern goods (food, oil, wine, textiles, coastal real estate) or services (tourism). The growing trade deficit was bridged by northern banks supplying loans for southern purchasers of German goods.
Portugal, Ireland, Greece and Spain are now caught in a triple bind: their exports cannot grow because they cannot be boosted by devaluation; their domestic demand cannot be stimulated because of draconian austerity measures; and their economies are additionally burdened by high interest rates on huge, German-led rescue packages. By design or by default, Germany appears to have created a new European order. Decisions made in Berlin and Frankfurt are affecting the economies of some half-dozen peripheral countries inhabited by a hundred million people.
In the long run this is but a Pyrrhic victory for the Germans. Eventually they’ll still need to write off a significant portion of southern debt, but this would set a precedent that would undermine the credibility of the eurozone. Even less acceptable alternatives entail allowing higher inflation rates all over the zone, or else continuing with large net transfers and ad hoc rescue packages when crises erupt. Squaring the circle of operating a single monetary policy and uniform interest rates for a widely different group of countries will continue to produce periodic emergencies all along the periphery. The alarms will take different forms at different times—a fiscal crisis here, a banking collapse there, a property slump everywhere—but like the erupting lava finding its way through the Earth’s crust, the crises will never stop and can never be resolved.
If the eurozone is abolished—or perhaps after it is reduced to its northern, hard-currency, inflation-free core—it will be possible to recreate a self-adjusting exchange-rate mechanism that reflects different countries’ economic efficiencies and fiscal policies. Once it is accepted that the euro has always been a political project not justified by economic considerations, Germany will no longer be obliged to go on “helping” the EU periphery, and southern Europe’s historic small nations will be free from the unloved Leaderin’s coldly suffocating embrace.