Bill Emmott - International Author & Adviser


Europe´s problem is too much leadership
The Times - June 11th 2012

The mind-concentrating merits of imminent catastrophe can be praised once again: the decision by euro-zone finance ministers to lend Spain enough money (100 billion euros) to remove current doubts about the stability of its banking system is a welcome recognition of reality, as well as a welcome preparation for Greece’s possible default and exit from the euro after next Sunday’s elections. But the praise should stop there. The reality, no the truth, is still not being fully recognized.

            One part of the truth concerns the course being set by the present economic policies of both the euro-zone and of Britain. Today’s Europe-wide policy of budgetary austerity in all circumstances, alongside continuing fears of financial meltdowns and in a world economy in which even the sprinting elephants of China, India and Brazil are running out of puff, is guaranteeing at best stagnation, at worst a downward spiral.

            Companies, in both Britain and the continent, are sitting on cash and reluctant to borrow, lest things get worse—which helps ensure that they do. This is exactly what happened in Japan during the late 1990s, after its long, slow, confidence-destroying official response to its own financial crash led to a long deflationary stagnation. Japan was socially and economically strong enough to endure the consequences. It would not be wise to bet that either Britain or most European countries would prove similarly resilient.

            For George Osborne is wrong when he blames the euro-zone for Britain’s recession; Ed Balls is wrong when he says the recession has been made in Downing Street. The truth is that both Downing Street and the euro-zone are to blame. They are following the same policy, even egging each other on as they do so.

            The macro-economic reality is that simultaneous fiscal contraction by all the western countries—including those, like Germany, Britain, Japan and America, that are being offered ultra-low borrowing costs—is dealing with a symptom, namely high public debts, while gradually killing the patient. It is painful to say it, but the French Socialists, striving in their country’s parliamentary elections to give President Francois Hollande a working majority on June 17th, are right. Those governments that can, need to boost demand.

            It is not clear that France has a lot of room to do that, though it probably has some, with French government bond yields at just 2.4%. But it is clear of Germany, with its budget deficit of just 1.3% of GDP forecast for this year, as it arguably also is of Austria, the Netherlands and all of Scandinavia, given their low borrowing costs. And Britain’s 1.6% rate on gilts must surely eventually persuade Mr Osborne that it makes more sense for him to borrow to build and repair more roads than to try to do so more expensively through private investors.

            That economic-policy reality is the most important shadow hanging over Europe: more important than the euro itself. For this downward spiral, ordained by governments’ over-interpretation of bond-market fears, is itself the reason why so many governments’ debts look unsustainable. Spain’s banks are in trouble because its property market keeps on declining, making more and more loans turn bad, thanks to declining demand at home and abroad.

            It has been common, during the euro’s long stumble from crisis to bail-out to further crisis, to decry the lack of leadership from Europe’s politicians, especially from Germany’s Angela Merkel and France’s unlamented former president Nicolas Sarkozy. Yet actually the problem has been different: too much leadership, expressed through the imposition of universal budgetary austerity; and incompatible leadership, thanks to a basic difference of opinion about the very nature of Europe’s monetary union.

            Each bail-out or “firewall” construction exercise has been an attempt, so far successful, to buy time to avoid confronting that basic difference of opinion. The Spanish bank rescue will now do the same though not, given the Greek elections, for very long. Much, much more time would be bought if only the austerity-leadership would be put into reverse, but that looks unlikely.

            The difference of opinion is, as has often been noted (apologies) in this column, over whether Europe’s monetary union is to be run with enforceable rules but national responsibility for public debts, or whether it is to be a system with collective responsibility and associated collective governance. In 1999, the euro was born with the structure of the former idea, but the political sentiment of solidarity.

            Now, its problem is that it has neither—or, rather, that it has a bit of both, which means much the same thing, since no one quite knows in which direction the currency-system is heading. The fiscal pact that Britain so rudely shunned last December was a sharp German-led move back to rules, and a pledge that this time they really would be enforced. The Spanish bank rescue this past weekend has been a tentative move towards solidarity, the mutualisation of a public-debt problem, in this case the Spanish government’s need to guarantee its banks.

            Next Sunday, if the Greeks vote in a government determined to renegotiate the terms of its loans, we will have a new, somewhat scary test of which direction the Germans in particular are willing to go. If, as has been implied by statements by both Mrs Merkel and her finance minister, Wolfgang Schauble, Germany’s response will be to say that if Greece cannot abide by the euro’s rules it must go, that will be a strong confirmation of the law of rules.

            An alternative theory is that Mrs Merkel is waiting for the Greeks to go before making a clear, decisive move towards collective responsibility for the rest of the euro members. Ideas abound that she will propose mutualisation of debts above 60% of GDP, for a specified period, or something similar.

            I somehow doubt this. When she told David Cameron last week that Europe needs deeper political and economic integration, this was not a statement of intent but rather a statement of what would need to happen before Germany would be willing to open its chequebook. After all, any move towards taking on liability for other countries’ debts will risk being overturned by Germany’s Constitutional Court unless there is a watertight treaty governing it—and rejected by voters, if controls on the use of Germany’s money look flakey.

            So my suspicion is that Germany does not, in its heart, or in its voters’ minds, accept that the euro must be an “irrevocable” monetary union, for revoking it is ultimately necessary if rules are to be enforced, and thus retained as the currency’s basic structure. Greek exit will be the proof of that. We will find out rather soon. Anyone know the German for “pour encourager les autres”?


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