If the European monetary union is something like a bad marriage, what can be done to avoid a messy and disastrous divorce?
Broadly speaking, there are now two prescriptions. One calls for sacrifices and compromises from all sides. The other, echoing the law that used to exist in many societies, is simple: the husband — Germany — should rule. Did not the wife promise to obey? It is too late to try to get out of that agreement.
At the heart of the euro system problem now is that most of the rest of the countries are no longer competitive with Germany. They are running large current-account deficits, and the existence of the euro means they cannot devalue their currencies to make their exports cheaper and their companies more competitive. With no currency adjustment possible, a German central banker, Andreas Dombret, explained this week, “other things must therefore give instead: prices, wages, employment and output.” The question now, said Dr Dombret, a member of the executive board of the Bundesbank, “is which countries have to shoulder the adjustment burden.”
Dr Dombret’s answer is blunt: Not Germany. “The deficit countries must adjust,” he said. “They must address their structural problems, reduce domestic demand, become more competitive and increase their exports.” Suggestions that “surplus countries should shoulder at least part of the burden,” he said, simply miss the point. No one can expect Germany to do anything that might affect its competitive position relative to the US or China, as could happen if German inflation were allowed to rise.
Until now, Germany has seemed to more or less get its way, albeit at the cost of having to put up money to avert disaster. The other Golden Rule — he who has the gold rules — has applied. Faced with German anger, and pressure from financial markets, both Greece and Italy jettisoned elected governments in favour of governments that would be run by “technocrats” who would do the right thing, as seen from Berlin. “Merkozy,” the combination of Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, dominated European summit meetings.
But now the European political winds seem to be moving against Germany. The Dutch government, which had been Germany’s staunchest ally in demanding more and more austerity from the so-called peripheral countries, found it could not get that prescription through its own Parliament. Elections are expected later this year.
More ominously from a German point of view, Mr Sarkozy’s own future seems to be tenuous. On Sunday, he finished second in his bid for a second term, behind François Hollande, the Socialist candidate who has been calling for less austerity and more efforts to stimulate economic growth. The runoff vote will be held May 6.
Given the fact that France has its own problems, Ms Merkel might be tempted to go it alone in ruling Europe. But as one German official told me a few months ago, France is an essential partner because of Germany’s “special history.” German domination of Europe has an unfortunate precedent.
The day after the French voted, I listened to Jens Weidmann, the president of the Bundesbank and formerly a top adviser to Ms Merkel, speak to the Economic Club of New York and throw down the gauntlet. Departing from his prepared text, he warned that agreements previously made must be respected, adding that the necessary fiscal union meant that some “national sovereignty” would have to be sacrificed. Mr Hollande talks about amending Europe’s fiscal treaty mandating austerity; Dr Weidmann views it as sacred.
The European Central Bank’s sole mandate under the law is to preserve price stability for the euro area as a whole, defined as keeping inflation under 2 per cent. At the moment, with Germany doing well and much of Europe in or entering recession — and Spain being closer to a depression — there is no such thing as the euro area as a whole in any reasonable sense. But a central bank trying to live up to its mandate might focus on rampant deflation in countries being forced to slash wages and spending and decide that a little inflation elsewhere — such as in Germany — makes perfect sense.
The Germans are having none of that. “Let us say that monetary policy becomes too expansionary for Germany,” Dr Weidmann told the Economic Club, making it clear that it is not German national sovereignty that needs to be sacrificed. “If this happens,” he said, “Germany has to deal with this using other, national instruments.” He did not specify what those instruments would be.
The idea that Germany knows best — that what is best for it is best for the euro zone as a whole — is growing less and less popular in the rest of Europe. In northern Italy, some companies are muttering about a German conspiracy to devastate the Italian economy, to enhance the prospects for German companies. In France, the anti-immigrant National Front Party received nearly 18 per cent of the votes. In the Netherlands, it was the defection of a right-wing, anti-immigrant party that led to the government’s collapse. Anger is on the rise in many countries. That worries a lot of people, and politicians in many countries are now talking about the need to pursue policies that will bring growth soon, rather than in some distant future.
But there is little evidence that the Germans are concerned. In his speech, Dr Weidmann conceded that the German prescription of austerity for all “might, under normal circumstances, dampen aggregate demand and economic growth.” But, he added, these are not normal times. “A widespread lack of trust in public finances weighs heavily on growth,” he said. “There is uncertainty regarding potential future tax increases, while funding costs are rising for private and public creditors alike.” In those circumstances, continued austerity “might inspire confidence and actually help the economy to grow.” Andrew Mellon, Herbert Hoover’s Treasury secretary, could not have said it better.
Germany has been by far the biggest beneficiary of the euro. Its manufacturers have prospered in no small part because the lack of competitiveness of other euro area countries has held down the value of the currency. Were the currency to collapse, Germany would suffer greatly. A new Deutschemark would no doubt rise rapidly against other currencies, making Germany’s goods more expensive and in that way damaging the country's competitiveness.
The fact that there is no easy way to break up the euro zone — and that no one can be sure just how painful it would be — is the best reason to think that, somehow, the euro will endure in all the countries that now use it. Germany’s rigid belief that others must suffer to preserve the system may yet make some other country decide to take the risk of ending what has become a very bad marriage.
©2012 The New York Times
