BERLIN – Europe and its national governments are basking in their new capacity to act – and not without reason. Who would have dared, even a few weeks ago, to predict that in the end it would be the divided Europeans, not the United States, who determined how to contain the global financial crisis?
Serious crises are defining moments in history. To be sure, the US is in an interregnum until the election of a new president. Moreover, George W. Bush seems to be far weaker than any normal “lame duck” president, creating a global power vacuum that has been filled vigorously by French President Nicolas Sarkozy, who is also the current president of the European Council. Sarkozy already took on this role in the Georgia crisis; now he has reinforced it.
By summoning the euro group, which so far includes 15 European Union members, the French presidency could rely on a politically functioning avant-garde group. Especially with regard to financial and currency issues, the EU has a strong institutional base – the euro as a common currency, the European Central Bank, and the binding budget and debt criteria of the Maastricht Treaty. Indeed, the current global financial crisis has demonstrated once more that the EU is strong where it has integrated its member states’ interests and weak where it has failed to do so.
Of course, the crisis has not been overcome. We have gained time and can take a deep breath – no more and no less. When you are hanging over an abyss, as the global financial system has been in the past few weeks, then gaining solid ground, even if only temporarily, makes a big difference.
However, beyond the mortgage market, other huge risks are lurking, especially in the US financial system: credit cards, car loans, and presumably a few other things. So there are good reasons to doubt that governments’ and central banks’ current actions will really redress the crisis.
Parallel to this, the next tsunami is approaching, threatening to inundate the real economy. True, everybody is complaining about America’s speculative bubble, and they are right to do so. But the whole world economy – from China to Germany – benefited for decades from Americans’ debt-driven over-consumption.
Machinery to China and everywhere in the world; Porsches, Mercedes, and BMWs to the US – that was Germany’s winning formula in this period. Thus, a dramatic decline in the real economy, following the collapse of the financial house of cards, will have serious consequences for Germany and the EU. The breakdown of the US engine of growth cannot, at least in the short term, be replaced by Asia and stimulation of China’s domestic economic activity. That means that the world economy is approaching a protracted deep recession. Even a global depression cannot be excluded in the face of this fundamental crisis.
So far, thanks to the euro, the ECB, Gordon Brown, and Sarkozy, the EU has worked well in the world financial crisis. But the link between the global financial and economic crises will confront Europe with severe challenges – but also a big opportunity.
Simply put, Europe’s nation states are too small to address a crisis of this dimension on their own. Only the EU can protect the interests of all Europeans – including those outside the euro zone and even outside the EU. But, while Europeans have created strong institutions with the euro and the ECB, they still lack an adequate political superstructure to confront the coming economic crisis.
For many years, France has called for a European economic government for the euro zone, which Germany has so far rejected, for good reasons: France’s initiative was nothing but a hidden attack against EU members’ annual fiscal-deficit ceiling of 3% of GDP and worse, against the ECB’s independence. And the recent ill-conceived proposals of the French president on state ownership made things even worse in Berlin. But, given the global economic and financial crisis, the question now is whether Germany should abandon its resistance to a European economic government and, instead, lead the way toward creating it.
After all, if the crisis in financial markets continues and combines with a dramatic slump in the real economy, the EU could quickly be at risk if it cannot respond politically. There is therefore an urgent need for macroeconomic and fiscal coordination at the EU level.
This is all the more true because the European Commission is currently proving to be a near-total failure. An incompetent president of the Commission has had his term renewed for another five years as a reward for his innocuousness. Alas, this, too, is Europe.
The German chancellor and her Minister of Finance must now quickly learn from their mistakes of recent weeks. To wait until events in Europe force them into line has turned out to be a bad strategy. It would be far better for the German government to take the bull by the horns by defining the principles of a European economic government in such a way that both countercyclical debt policy within the Maastricht framework and the ECB’s independence are preserved.
This means not dividing Europe, but forming an active and inclusive avant garde. The EU needs an economic government for the deep and long crisis ahead. Germany, Europe’s biggest and most important economy, should lead the way decisively.