Published in Business Spectator (Melbourne), 28 November 2011
If newspaper reports over the weekend are to be believed, German chancellor Angela Merkel and French president Nicolas Sarkozy are preparing a new eurozone stability treaty. Such news would almost be funny were it not for the seriousness of the euro crisis.
There is an old joke about a man being told by his doctor that he has only half a year left to live. “What should I do?” asks the frightened patient. “Marry an economist”, the doctor replies. “And, will that make me live longer?” the patient wants to know. The doctor’s answer: “No, but half a year will just seem much longer.”
Merkozy’s grand stability plan is just like this old joke. A new stability pact will not cure the ailing eurozone. It is just another placebo for capital markets that have lost confidence in European politicians’ ability to solve the continent’s many crises. But it won’t make the euro a workable currency.
To be clear, there is nothing wrong with a commitment to budgetary prudence and fiscal stability. Just as there is nothing wrong per se with marrying an economist. But in present circumstances, signing off on another stability treaty won’t save Europe – just like a marriage with an economist does not make you live longer.
The planned stability pact shows how Europe’s leaders still haven not grasped the nature of the crisis. They pretend that it is almost exclusively a debt problem on the outskirts of Europe.
This is particularly convenient for Angela Merkel. She can point the finger at supposedly profligate South European governments that did not keep their finances in order. She can blame them for running reckless budget and trade deficits. And with every ounce of blame heaped onto the others, Merkel makes Germany look even more virtuous with its hyper-productive economy, its allegedly super-solid public finances and its massive trade surplus.
There is only one problem with Angela Merkel’s world view: It is not true, at least not entirely.
Spain and Ireland are the perfect counter-evidence to Merkel’s morality tale of the gracious Germans and the reckless rest. When Germany was running substantial budget deficits in the early years of the century, Spanish and Irish budgets were often in surplus. Spanish and Irish debt was well below Germany’s public debt level. In Spain’s case it still is. If the debt crisis had started a decade earlier, it would have been periphery countries scolding Germany for its budgetary excesses.
By the way, at an official debt ratio of 82 per cent of GDP and implicit liabilities well above the 400 per cent mark, Germany should be the last country to admonish others over fiscal profligacy.
Similarly, Germany cannot blame other eurozone countries for their trade deficits while taking its own trade surplus with the rest of Europe as a given.
Quite logically it is not possible for every country in Europe to run a trade surplus with every other European country. In other words, the trade deficits of the rest of Europe are just the flipside of Germany’s trade surplus. It is a surplus the Germans reached through hard work, productivity increases and wage restraint. But it is also due to a currency which does not reflect Germany’s export strength but other eurozone members’ export weakness.
For these reasons it is wrong to reduce the European crisis to a public debt crisis. The crisis goes well beyond this, and it was a mistake in the construction of the euro only to provide for a weak fiscal stability framework while ignoring all other areas in which economic convergence between member states would have been necessary.
A new fiscal stability framework for Europe will not calm the markets, let alone end the crisis, because it does not address the more fundamental question of how 17 structurally extremely different countries can be united in a single monetary framework. As long as the business cycles of European economies are not synchronised; as long as labour mobility within Europe remains a theoretical rather than a realistic possibility; and as long as there is no automated fiscal equalisation mechanism, Europe will not be an optimum currency area. And fiscal stability alone will not make it one.
There is a second reason why markets should be less than impressed with any new fiscal stability framework. Throughout the European crisis of the past few years we have been able to observe how treaty law is applied in Europe:
– Independence of the European Central Bank is guaranteed in the treaties but de facto suspended.
– The ‘no bail-out’ clause was a crucial element in the establishment of monetary union but it is now violated on a daily basis.
– The old Stability and Growth Pact already contained strict rules for debt and deficits but it has been and still is routinely ignored.
Why, given this track record, should anyone believe that a new stability framework would be enforced any more vigorously? Is there any reason to believe Merkel or Sarkozy would be better at implementing the new treaty than they were at playing by the rules of the old treaties?
The new stability treaty is like the idea to leverage the EFSF’s borrowed billions to several fantasticatillions: It is a promise based on a fiction to hide a scam.
All that Merkel and Sarkozy are trying to achieve is what they have been doing in the past two years: to buy more time. But time has run out for vague promises.
By emphasising fiscal stability, Merkel and Sarkozy are demonstrating once again that they still cannot comprehend that the crisis they are dealing with is not just a public debt crisis. It is the crisis of a monetary union that should have never been established in the first place. Europe’s economies were too different when it was started, and they are certainly no less different today.
The only responsible way would be to finally acknowledge that monetary union was a gargantuan economic mistake and try to wind it up in a half-way orderly fashion. If Europe’s politicians are not going to do it the markets will do it for them.
The euro won’t survive a day longer just because of the political marriage of the German chancellor and the French president. But their botched crisis management indeed makes the time until its eventual collapse seem much longer.