Reuniting Europe
The German Hour
Jean Pisani-Ferry
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BRUSSELS – A series of developments over the last few weeks have set in motion a downward spiral for the eurozone. Unless officials – especially German officials – act fast, the verdict of financial markets is bound to be ruthless.
First, the eurozone has failed to turn the tide. Mario Draghi, President of the European Central Bank, was right to note that, despite numerous ministerial meetings and three summits, implementation of the decision to increase significantly the firepower of the European Financial Stability Facility (EFSF) is still lacking. There are now growing doubts about the effectiveness of the EFSF.
Second, and partly as a consequence, virtually all eurozone countries’ debt is trading at a discount relative to German Bunds. While it was necessary to price risk more accurately, it is difficult to believe that the Netherlands, with a debt ratio nearly 20 percentage points lower than Germany’s, deserves to be assessed as a higher default risk. But now even the mighty Bund has started to suffer from heightened market anxiety.
Third, financial-market participants and, increasingly, real businesses are pricing in a possible breakup of the eurozone, if not the end of the euro itself. It is still difficult to think the unthinkable, let alone work out the details of it, but any rational player must now consider the possibility. If expectations of disaster build, and a growing number of players start positioning themselves to protect themselves, the consequences could become overwhelming. Not only the eurozone would suffer.
Fourth, Germany has become the eurozone’s undisputed leader. Although France continues to play its role as the other half of the European Union’s leading couple, it has lost influence and the ability to take the initiative. A weaker French economy, shakier public finances, and the coming presidential election are all combining to alter the balance with Germany. Political audacity can carry France only so far.
In this context, Germany again finds itself in a situation akin to that of the late 1980’s, when the Bundesbank was setting monetary policy for the rest of the continent. At that time, German Chancellor Helmut Kohl wisely concluded that German economic dominance of Europe was not conducive to a stable equilibrium, and that a better plan for the future was to build on Germany’s weight and influence to create a permanent common monetary order. Kohl’s insight gave birth to the euro.
Today, once again, it is in Germany’s best interest to ensure lasting stability in Europe. With foreign assets worth €6 trillion ($7.9 trillion), most of which consist of claims on its eurozone partners, Germany would lose out massively if the eurozone fragments. Claims on entities within partner countries would be redenominated in weaker currencies – or the borrowers would default on them. Obviously, German exporters would be hurt by substantial currency appreciation.
German Chancellor Angela Merkel has sensibly decided to take the lead on reforming the eurozone. But many Germans feel deceived by some irresponsible eurozone partners, giving rise to the temptation to use Germany’s current strength to toughen sanctions and coerce weaker countries into adopting constitutional changes, especially concerning fiscal policy.
This is a risky attitude. To be sure, Germany has far more leverage today than it has had at any point in the last 20 years. But attempting to extract unilateral concessions from partners is a recipe for disappointment. It is one thing is to be sanctioned for breaching the rules, as with the Stability and Growth Pact; it is quite another thing to permit elected national governments and parliaments to be overruled, and national budgets censored, by an unelected higher authority.
The EU’s members are unlikely to agree to major reform unless Germany offers something in return. Absent a more balanced deal, what is likely to emerge from negotiations is simply another layer of largely ineffectual and ultimately divisive sanctions.
The natural quid pro quo for ex ante budgetary control is solidarity through the creation of Eurobonds. Joint and several liability for public bonds is imaginable only if countries offering their guarantee – and thus potential access to their taxpayers – can exercise veto power and prevent a partner country from issuing more debt. Thus, legally binding ex ante control is a necessary condition for Eurobonds. Conversely, surrendering budgetary sovereignty to eurozone partners is acceptable only if it accompanies their guarantee that they will come to the rescue in case of accident.
Germany should be bold and use its leverage to offer a new contract to its eurozone partners: mutual guarantee of part of their public debt in exchange for strict debt limits and a new legal order in which a eurozone authority can veto an enacted budget even before it is implemented. Only such boldness will deliver the certainty that markets need – and it is Germany’s responsibility to be bold.
Jean Pisani-Ferry is Director of Bruegel, an international economics think tank, Professor of Economics at Université Paris-Dauphine, and a member of the French Prime Minister’s Council of Economic Analysis.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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realitaetsschaukel 02:52 29 Nov 11
Both the article and the comment from Zsolt are nicely written.
Just last week my personal take on this longterm crisis reached a similar state to that of Zsolt.
"We have to start calculating, planning and acting for each other ..." is the call for the golden rule of ethics to be implemented into economy. Ultimately it is the call to implement some type of controlled economy, and such simply won't happen anytime soon.
Currently our awareness of global conectedness is on the rise, partly pushed by the financial realities and partly because of the climate change/sustainability debate. Awareness in itself is no solution. My guess is that we, Europe and the West in general, will rely on our old ways of doing things as much as we can and as long as we can.
Only proven (felt by a majority) catastrophy will serve (potentially) as a setting to legitimize a change of such a grand scale. A change towards such a direction at the moment would lack justification in an environment where throwing atomic bombs (economical and financial ones) is proven to be the most effective way to generate "development" and stability for the masses.
A global financial fallout would actually be the fastest way to change our approach.
As it seems now only Europe will suffer such a devaluation of assets. Maybe we should see it as just another step towards the 2nd league of global players. An adjustment to the facts of demography, economical dynamics and the bill for wrong/ill trading policies.
Chances are quite low imho Europe will be able to recover from this blow as it did from WW2. One can only hope that the freedom of information in our age will soften our downfall.
bkkopp 11:03 03 Dec 11
In addition to Germany, there are Finland, Austria and all of Benelux - at least six countries, but with Slovakia, Slovenia and Malta possibly even nine of seventeen - that are in the same mould on Eurobonds. Germany is for obvious reasons leading the group, but the 'Germanic' aspect is grossly overplayed, not just in the UK and in Greece.
I am not excluding that an agreeable concept for Eurobonds could be found into the future, but all we have heard so far is the demand for a radioactive debt instrument that will destroy the fundamental European consensus.
All present liabilities of countries are based on the sovereign right of their respective social contract and democratic legitimacy. No other country can just join that social contract long after the fact and join the previously incurred liability.
Zsolt 09:40 28 Nov 11
It is interesting that after all that happened even just in the last month we still do not want to accept that possibly leaders do not act because there is nothing they can do, and not because they do not want to do it.
And while I am sure we could give this a very complex financial, economical answer, the important and simple answer is within the article itself:
"...Third, financial-market participants and, increasingly, real businesses are pricing in a possible breakup of the eurozone, if not the end of the euro itself. It is still difficult to think the unthinkable, let alone work out the details of it, but any rational player must now consider the possibility. If expectations of disaster build, and a growing number of players start positioning themselves to protect themselves, the consequences could become overwhelming. Not only the eurozone would suffer..."
There is no solution because everybody still only thinks about themselves, to "protect themselves" as the article says, nobody is willing to leave the boundaries of self interest, giving without assurances, extending themselves when they cannot be sure if they ever recieve it back in some form.
In a global, interdependent network we live in such mentality cannot work any more, and it becomes destructive. We have to start calculating, planning and acting for each other, for the benefit and well being of the whole network, not only in Europe but all over the globe.
Of course such an attitude only works if all participants start thinking and behaving the same way at the same time in a completely mutual fashion.
In order that to happen all of them need to understand why they need to do so, to feel a clear motivation to start changing themselves willingly without being forced.
For that to happen we need a global information/education program so people could understand this interconnected, integral system, and understand that any individual or nation can only benefit from the balanced, healthy system that functions optimally.
And than based on this understanding we can start re-building the structure, together, equally, taking each other into consideration around a "global round table".
Obviously this is a process, which will not provide an overnight fix. But today there is no miracle cure or overnight fix, the present structure is ailing and is going to collapse. What we need to do is to prepare for the transition, the rebuilding, and we have to start this process now, so we can shorten and sweeten the collapse and the suffering. If we act swiftly and wisely we can still make this process a very smooth one, and the result, the new human structure could surprise us way beyond our expectations.