The Euro’s 11th Hour
WITH each passing day, the noose around the neck of the eurozone grows tighter, with no indication that European leaders share any coherent vision for avoiding the hangman.
Instead of tackling structural problems, much of the endless chatter about the common currency centres on financial engineering: rescue funds, backstopping banks, printing money and the like.
At the heart of the European quandary is the conundrum that ideas that are economically sensible are not politically feasible, while ideas that are politically possible make little economic sense.
Topping the ‘must do’ list is the need to fix the disastrous design flaw in which the 17 members agreed to a common monetary policy without coordinating their budgets and regulations.
A consequence was broadly divergent competitiveness. Since 2000, wages of German workers have increased barely more than efficiency has grown, an enormous advantage in global markets. Meanwhile, Greece’s unit labour cost (the average cost of labour per unit of output) has increased by roughly 40 percent.
Greece is merely the most disobedient of a passel of problem children; by this all-important measure, the other 15 members are mostly sprinkled closer to Greece than to Germany.
Without the ability to adjust exchange rates, eurozone countries with rising labour costs can’t compete against export powerhouses like Germany. But fully integrating 17 economies and undertaking the necessary restructuring remains, not surprisingly, politically absurd, with Europe’s clock clicking down.
Frustrated, European leaders have descended into the five stages of grief: denial, anger, bargaining, depression and – by some – acceptance that the euro could fall apart. They have embraced ideas that simply won’t do the job. Consider the simplistic headline- grabbing debate between growth (greater deficits) and austerity (smaller deficits).
In the near term, additional spending reductions or tax increases would only exacerbate high unemployment, now 24 percent in Spain. But pushing the larger deficits associated with a growth approach risks embedding inefficiencies and inciting a collapse of confidence in the bond markets on which Spain depends for its large borrowing needs.
Nor would ’Eurobonds’ – the fashionable solution embraced by the new French government – do anything to address the imbalances in competitiveness.
Like giving spirits to an alcoholic, they could exacerbate the imbalances by reducing pressures on less-competitive countries to reform.
Weaker countries, fearful of forfeiting sovereignty, contend that they are acting forcefully and blame fickle financial markets for their rising interest costs.
To be fair, the new technocratic Italian government led by Mario Monti has trimmed its budget deficit and reformed pensions.
But those measures fall short of the needed overhaul, particularly in regard to rigid labour laws.
Amid the cacophony, Mario Draghi, head of the European Central Bank, and Olli Rehn, the European economic commissioner, have spoken sensibly about the diagnosis, even if they have sometimes understated the need for surgery.
Meanwhile, all roads lead to Berlin.
Ironically, a currency created in part to curb Germany’s influence following reunification is now effectively under German control. Chancellor Angela Merkel has been caricatured as the leader of the austerity campaign, although the measures that she is demanding of others – like wage restraint and greater labour-market flexibility – mirror those Germany adopted over a decade ago.
In part, her tough stance reflects domestic politics; Merkel’s Christian Democrats have suffered recent defeats in state and local elections and will face an electorate next year that staunchly opposes bailing out countries that have failed to match Germany’s discipline.
But recognising the risks of euro disintegration – articulating the costs of a breakup is easier than explaining the benefits of remaining together –Merkel has recently been signaling that Germany’s opposition to aiding the weaker countries could be relaxed.
In essence, she (like the voters of Greece) is playing a huge game of chicken.
She wants the weaker countries (including even France) to clean house before loosening German purse strings.
If that happens, Germany would be well advised to back short-term financial rescue actions similar to those the United States undertook in 2008.
And the stronger countries must also accept the need for fiscal transfers – subsidies to poorer eurozone members – just as states like New York pay far more in federal taxes than they get back in services and transfer payments.
The eurozone may find another piecemeal solution and escape the hangman for now, but unless it attacks its more fundamental problems, it is doomed to a cascading series of crises that will ultimately destroy the common currency.
(Steven Rattner, a contributing opinion writer, is a long time Wall Street executive and a former counsellor to the Treasury secretary.)