On July 26, as traders were once again deserting Spain’s government bonds, setting up the risk of a default and a deeper crisis of the euro, Mario Draghi, president of the European Central Bank surprised and delighted financial markets. Speaking off the cuff in London, he vowed to do “whatever it takes” to save the European economy.
All the bland platitudes coming out of the Group of 20 Meeting in Mexico can’t disguise the absence of progress on the European crisis. German Chancellor Angela Merkel is totally dug in on the proposition that Greece, Portugal, and Spain need to stick to the austerity medicine that will only deepen the collapse and embolden more speculative attacks on government bonds.
Europe’s top politicians, led by German Chancellor Angela Merkel, seem determined to repeat the same mistakes over and over again. Last weekend, the financial crisis seemed to be contained for the moment when the Germans and the European Central Bank agreed to commit 100 billion euros through the European Union’s (E.U.) rescue funds to recapitalize Spain’s faltering banking system. The Spanish government bargained hard, and won an agreement that the bailout would not be tied to new austerity demands of the sort imposed on Greece and Portugal.
BERLIN—Germany, uniquely, is prospering while the rest of Europe sinks deeper into recession. And the recession is substantially the result of the very austerity that Chancellor Angela Merkel is imposing on the other member nations of the European Union.
Why is Germany spared? One good reason and two bad ones.
The good reason is that Germany promotes manufacturing, with sensible training and technology policies. Its industries have partnerships with effective unions. So Germany’s huge export surplus means that it can have tight budget policies at home and still have plenty of good jobs.
Finance ministers from the 17 eurozone countries agreed this week that it's time to make contingency plans in case Greece drops out. While some leaders—like new French President François Hollande—have floated offering eurobonds to struggling member states like Greece and Spain, German Chancellor Angela Merkel is standing her ground. "We want Greece to remain in the eurozone," Merkel said after yesterday's European Union summit. "But the precondition is that Greece upholds the commitments it has made."
Consistent in its suicidal tendencies, the Greek political system failed this week to come to an agreement on forming a coalition government. The leaders of Greece’s political parties—as we know from the published minutes of the meetings with the President of the Republic—showed themselves, with one or two dignified exceptions, tragically unable to rise to the occasion. New elections have now been called. The outcome on June 17, or even the mounting uncertainty of the pre-election period itself, could spell the end of Greece’s membership of the euro.
This week's a big one for the future of Europe, as Germany debates supporting the fiscal pact agreed to in Brussels on March 2 and investors sign onto a Greek bond swap that could write off half of the country's €177 billion debt.
Yesterday, the German Parliament relented and agreed to let the Greek debt restructuring go forward, but only the price of crushing austerity for the Greek economy. This is a widespread attitude in Germany, where aid to the Greeks is unpopular.
The other day, Jörg Krämer, chief economist for Commerzbank in Frankfurt, said of the Greeks, “If you live beyond your means, then you can repair your balance sheet only if your consumption goes down.”
But the Germans might take a moment and reflect on their own history.
So you think congressional Republicans are the only right-wingers who like to append their pet (and sometimes, wedge) issues—like the Keystone pipeline—to must-pass legislation like the payroll tax-cut extension? Guess again—it looks to be a trans-Atlantic syndrome.
Yesterday, both Bob Kuttner, here in the Prospect, and I ,in my Washington Post column, noted that the deal that German Chancellor Angela Merkel and French President Nicolas Sarkozy struck to save the Eurozone will inflict years of austerity on European nations that are already mired in depression. Spain, for instance, has an unemployment rate of about 20 percent and a youth unemployment rate that is approaching a mind-boggling 50 percent. It needs a massive Keynesian jolt to its economy, not budgetary constraints that will condemn it to a decade or quarter-century of penury.
Federal Chancellor of Germany Angela Merkel this week proposed 80 billion euros in spending cuts and new fees in order to reduce her country's budget deficit. It's just one instance of a growing trend of fiscal tightening amongst countries around the world: