Analysts say German Chancellor’s prescriptions for growth will not create a fiscal union.
From symbol of the European Union’s strength and contender for the world’s reserve currency of choice to symptom of the EU’s underlying flaws and a currency on the verge of collapse, the last two years have been a roller coaster ride for the euro. The New Year will be crunch time for both the currency and the 17-member euro zone.
After months of summitry and political machinations that have claimed the scalps of governments from Italy to Greece, seen billions of dollars in bailout funds activated and a new intergovernmental treaty to establish greater fiscal coordination between 26 European countries agreed to, the next year will still be touch and go for the future of the euro. It could implode and bring both Europe and the global economy to its knees with it. Or it could pull through with a stronger European fiscal union rising phoenix-like from the ashes of the crisis.
Whatever the outcome, the person who will be blamed or hailed for the euro’s 2012 fortune, will be Angela Merkel. Ever since the region’s fiscal fires first began to blaze in early 2010, the German Chancellor has moulded Europe’s response and in the process overseen the re-emergence of a Germany that following decades of sublimation, once again bestrides Europe.
Not since the World War II have Berlin’s diktats had such far-reaching consequences for the rest of Europe. Poland’s Foreign Minister Radoslaw Sikorski reflected the wider mood in a speech in the shadow of Berlin's Brandenburg Gate in November.
“I will probably be the first Polish foreign minister in history to say so but here it is: I fear German power less than I am beginning to fear German inactivity,” he said, alluding to Germany's 1939 invasion of Poland that sparked World War II.
Merkel and the markets have been at loggerheads throughout the last two years, out of sync on both timing and style. Markets have been calling for quick responses involving flashy “big bazookas” that would involve no-strings-attached reassurances of unlimited backstops for euro zone members in trouble. But Merkel, true to her own, and some would argue the wider German, character has been measured and methodical, favouring consensus building for long-term reforms even at the risk of further inflaming markets in the short term.
A Lutheran from former communist East Germany, her cultural background was characterised by austerity and a strong work ethic, traits that she is now seeking to impose on all of Europe. Even as contagion from the Greece sovereign debt debacle swept across the euro zone with bond yields and political fortunes yo-yoing in the wake and despite enormous pressure from the international community to lay aside her reservations and act boldly, Merkel has striven to ensure that Europe’s response has been shaped by three of Germany’s priorities.
These are to avoid the assumed moral hazard that would ensue were Germany to foot the bill of profligate peripheral nations unconditionally by letting them off the hook of painful reform. To avoid inflation given the German anathema to price rise that harks back to the hyperinflation suffered by the country in the 1920s. And to insist on fundamental reform of the euro zone by moving towards a fiscal union to complement the existent monetary union, in particular measures that would enforce uniformity of budgetary disciple.
The German chancellor has thus doggedly refused to countenance a pooling of euro zone debt via the issuance of euro bonds or a more aggressive role for the European Central Bank in the absence of a clear quid pro quo. The quid pro quo she has forced includes the installation of EU-approved technocrats as head of governments in Italy and Greece with a mandate to deliver the austerity and structural reforms demanded by Berlin.
Her crowning achievement is the agreement at the December summit of EU leaders to establish a new intergovernmental treaty involving all save the UK, of the EU’s 27 member states, aimed at stronger fiscal and budgetary coordination. This is the kind of long term reform of the monetary union Merkel is convinced will produce the only lasting solution to the imbalances of the euro zone.
Merkel has had her way. For the euro the question is whether the German chancellor will be able to carry the markets with her. Thus far she hasn’t. Instead, she has consistently been accused of doing too little too late. And it’s not only her reluctance to produce a “big bazooka” that is criticised.
Some analysts believe her to be economically illiterate. They say her prescriptions will not create a fiscal union as much as an austerity union with little prospects of growth. Not everyone can be Germany, runs the argument. For Germany to export and save, others must import and consume. Deflation is as much a risk as inflation.
Thorough, stubborn and methodical, Merkel has engaged is some tough brinkmanship to ensure German red lines have not been crossed despite stiff opposition from its European allies. The outcome for the euro has thus far been ambiguous. The currency remains in peril. But if the painstaking slog towards greater political and fiscal integration that Merkel has set in motion pans out, it may yet emerge strengthened with some of the more egregious flaws in its design rectified. Going into 2012, Europe and the world will have their fiscal fingers firmly crossed that it does.
