(AP Photo/Michael Probst)
Despite a widespread fear that the euro is about to collapse, Berlin refuses to budge. Speaking at a joint press conference on Thursday with French president Nicolas Sarkozy and new Italian prime minister Mario Monti, German chancellor Angela Merkel again dismissed the idea of a massive intervention in the bond markets by the European Central Bank (ECB), saying the bank was only responsible for monetary policy. Though Paris, which is also now beginning to feel the heat of market pressure on its borrowing rates, disagrees with this position, Sarkozy did not push back. Merkel also-for the umpteenth time-rebuffed the idea of issuing eurobonds. In comments to the German newspaper Berlin Zeitung on Sunday, Bundesbank president and ECB governing council member Jens Weidmann blithely argued that Italy "can cope with rates over 7 percent for a while."
Last week, on a visit to Berlin organized by the Greek and German representations of the EU Commission, I was able to witness first hand the extent of the Merkel government's divorce from reality. In meeting after meeting with high-ranking government officials, we were served the party line: The Eurozone's problem lies in binge deficit spending and a longer-term lack of competitiveness. The fix, therefore, is austerity and structural reforms that will remake errant countries, on pain of sanctions, in the image of Germany . Those who prove unable to reform themselves, sources suggest, will be shown the exit. Specific proposals are expected at the next EU summit on December 9.
Aiming for smaller deficits and implementing some structural reforms to liberalize labor and product markets, increase research and development, and streamline procedures for foreign investment is a good idea. But stringent austerity, at a time when the Eurozone's economic outlook is rapidly deteriorating, stymies growth and makes a bad debt situation worse. And deep changes in the way economies work, aimed at regaining competitiveness, take years to produce results. Meanwhile, the common currency is on the verge of imploding.
This undisputed fact is understood in Germany, too-though not, it seems, by the government. Widely regarded as a master tactician, the German chancellor is unlikely to leave the picture anytime soon. Her party, the Christian Democratic Union (CDU), of which she is the absolute sovereign, retains a comfortable five-to-ten point lead over the opposition Social Democratic Party (SDP) in the latest polls. But if the center-right Free Democratic Party fails to cross the 5 percent threshold for entry into the Bundestag in an early election, she will be forced to govern with the Social Democrats or the Greens and, hopefully, to accept the necessity of certain dramatic moves to safeguard the viability of Italian and Spanish debt. But of course, the SDP may acquiesce to Merkel before she goes in to the normal September 2013 election. By that time, if she persists in her high-risk strategy of designing renovations of the European house while the fire is spreading inside it, the Eurozone may have burned to a crisp.
