Solving the eurozone crisis will take more liberalisation than Germany wants to swallow
Panic is not a word normally associated either with Germany or Angela Merkel. But that was the impression given by Germany’s announcement on Tuesday that it was banning short-selling of eurozone government debt or of shares in financial companies by German institutions. It was reinforced by Mrs Merkel’s speech to a barracking Bundestag the following morning, when she described the eurozone as being “in danger”, with “incalculable consequences”, and outlining the need for procedures for “orderly state insolvency”.
That is hardly a way to calm the markets, and not surprisingly it didn’t. Ungrateful and heartless creatures they are too, having lost confidence so quickly in the €750 billion stability fund that eurozone leaders put together on May 9. “Didn’t they realise that this means we European governments are not going to let the euro fail, that we all now stand behind each other’s debts?”, one can almost hear Mrs Merkel saying.
The ban on short-selling is just a pointless gesture that will have little effect beyond annoying other eurozone governments, who say that they were not consulted about it. But what Mrs Merkel is actually saying is that she is just realising the full implications of what she agreed on May 9. And neither she nor the German public likes them one little bit.
When the euro was launched in 1999, rules were set for the maximum size of budget deficits (3 per cent of GDP) and public debts (60 per cent). Among the first to break the rules were, guess who?, France and Germany. So when, amid the recession of 2007-09 and the bursting of several countries’ property bubbles, the southern European nations broke the rules big time, with Greek public debts double the official limit, it could hardly be a surprise. Nor can it be a surprise that it is European banks, especially in France and Germany, that lent the money.
But what to do about it? The solution on May 9, after an earlier direct bailout of Greece, was simply a declaration that the eurozone, with help from the IMF, would make sure that no member could be driven bankrupt by private lenders. This, it was said, bought time. Yes, two whole weeks, was the markets’ rude response.
The trouble is that it remains wholly unclear what the long-term solution will be. The immediate consequence of May 9 is that Greece, Spain, Portugal and Italy have had to announce or start preparing budget cuts. That austerity in an already weak eurozone recovery adds to doubts about the sustainability of European growth. The longer-term consequence, say Germany, France and the European Commission, will be much stricter rules on budget deficits, with more intrusive surveillance of each other’s fiscal policies. But how, and with what punishments for breaking the rules?
Presumably, if Greece, Spain or any other country could not obey these rules the ultimate penalty would have to be expulsion from the euro. But Mrs Merkel has already described any exit from the currency as unthinkable.
Odd though it may sound, last Saturday at a conference in Bahrain I heard one German version of what that would imply. Steffen Kampeter, the No 2 in the German Finance Ministry, said that what would have to happen is a strictly enforced fiscal union, combined with a broad liberalisation of goods, services and labour markets. In other words, if monetary policy is in the hands of the European Central Bank, and there is no fiscal room for manoeuvre, the eurozone had better deregulate and turn Thatcherite. He is right. No other answer is on offer to the question of how the eurozone will restore growth and get itself out from under its debts.
You may well ask if Spain, Italy or Greece will accept that medicine. But you should also ask if Germany will either. After all, it is Germany that in recent years has blocked full liberalisation of services trade and a common energy policy.
So there are tough decisions ahead, and some tough arguments about them, amid more euro-crises. With little prospect of growth, investors can be forgiven for being sceptical about whether the Southern Europeans can emerge from their debts without a Latin American-style restructuring — and Mrs Merkel’s comments about “orderly state insolvency” have only fed that scepticism. Should that restructuring take place, there would have to be more write-offs by European banks, most of which have not yet had the sort of rigorous clean-up that has been done in America. This, rather than any rapid exit from the euro for Greece or Spain is the likely shape of the next euro-crisis.
None of this is good for Britain; this weak, deflating European economy is our main export market. If this debt crisis were to end up turning Europe Thatcherite, that would be something for us to celebrate. But that is, shall we say, a step or 12 ahead.