Poking the Eurozone Bear

LONDON – The conventional wisdom is that, when confronted by a bear, you should lie motionless until it loses interest (or assumes that you are dead) and leaves you alone. But there are different species of bear, with some more likely to be deterred by bold, purposeful action. The question is how to determine the right approach when terror incarnate is staring you in the face.

This scenario is helpful for thinking about the eurozone as it attempts to survive its next round of trials – beginning with the European Parliament election in May. Can it continue simply to “lie still,” hoping that no new shocks arise that diminish its economic health, if not threaten its survival?

Some take the sanguine view that the current “lie still” approach is adequate to ensure that the eurozone economy does more than avoid decline. From their perspective, Germany’s decision over the last three years to permit actual and prospective transfers just large enough to prevent financial meltdown will somehow be enough to enable the eurozone finally to begin to recover from a half-decade of recession and stagnation.

But the fact is that these transfers – that is, European Stability Mechanism-financed bailout programs and the European Central Bank’s prospective “outright monetary transactions” (OMT) bond-buying scheme – can do little more than fend off collapse. They cannot boost economic output, because they are conditional upon recipient countries’ continued pursuit of internal devaluation (lowering domestic wages and prices).