Euro Crisis: Light at the End of the Tunnel?

Euro crisis

The Eurozone remains in real trouble despite recent efforts to strengthen the currency and allay the fears of investors.   Public sentiment in the North, especially Germany, is souring on the project.  But key governments are now starting to address their own budget crises, finally giving some reason for optimism.

CSM correspondent Isabelle de Pommereau reports ("Germany: Europe’s reluctant ATM") that there is real concern that Germany will drop the Euro altogether.

German reluctance to be a bank vault for other members of the European Union (EU) is rooted both in the past and in its changing identity today. Germans are ever mindful of the hyperinflation of the 1920s that was partly responsible for the rise of Nazism. Indeed, after World War II, keeping monetary stability became a national priority. "Germans are extremely concerned about fiscal stability in a way no other country is," says Oliver Marc Hartwich, a research fellow at the Centre for Independent Studies in Sydney, Australia.

Later, when it came time to join the EU, Germany was an enthusiastic participant. It paid the biggest share of European integration. Embracing a broader European identity "helped the Germans leave their catastrophic and embarrassing past behind," says Mr. Hartwich.

Yet the Greek crisis and a foundering euro has renewed fears of inflation. It coincides with a new, more assertive, Germany – one more skeptical of the EU. "German guilt has been turned into too much money over too many years," says Markus Kerber, a professor of finance at Berlin Technical University. "But this is over. All of a sudden Germans are grasping the figures."

While many people here believe Germany had no choice but to help Greece to avoid a broader European collapse, others now think Berlin might withdraw from the eurozone. One option would be for it to link up with other, more prosperous, neighbors. "The Dutch and the Austrians are fundamentally in the same situation," says Kerber. "They don’t want to see the monetary union turn into a transfer union."

Further, as CSM‘s Ben Quinn points out ("Can the European Union survive the debt crisis?") it’s not just Germany.

It doesn’t help that the debt crisis in Greece has triggered a reflowering of national self-interest in a number of European nations. In simplified terms, richer and supposedly more fiscally prudent northern states are reluctant to surrender sovereignty because of the perceived spendthrift ways of their southern neighbors. In response, more dispassionate observers point out that the frugal north is prospering largely because its exported goods are flooding south.

The yawning differences help explain why the eurozone could be headed for a permanent divide. In order to detach the debt-stricken south, momentum is building for mainly northern states to form a smaller currency union around Germany. The idea is for two zones, each with its own currency, which wags jokingly say could be the northern "neuro" and the southern "pseudo."

A rather cynical Spiegel editorial ("The Monster is Still Alive") contends that the pain Germany and others have borne to shore up the euro is all for naught.

In fact, nothing will turn out well, because the measures that have been decided or announced are not consistent enough, do not get to the root of the problem and are merely a diversionary tactic. Citizens are not supposed to notice yet the massive burdens they will face in the future. And besides, the Merkel administration is confusing the second financial crisis with the first one.

The ludicrous billions upon billions of euros being spent on the various rescue packages have driven government debt to astronomic heights. This deficit needs to be drastically reduced, but that isn’t possible without truly painful cutbacks. When that happens, there will be an outcry throughout the country, and the public will ask themselves: Why exactly should it be us who pay the piper instead of those who are at fault?

Anxiety is growing and, along with it, dissatisfaction. That’s why Chancellor Angela Merkel is suddenly advocating a tax on financial transactions, which she had only recently opposed. Suddenly the government is also banning speculative short selling, and it is demanding that hedge fund transactions be more transparent. None of this is wrong, and yet it is merely being done out of a sense of helplessness.


It is the governments themselves who are responsible for this second crisis, not bankers or speculators.  They have failed to place the common currency on a solid political and economic foundation. They have not transformed the monetary union into a powerful economic union. They tolerated the Greeks’ deception and have run up their own enormous debts, which are now limiting their options.

There is only one way out of the euro crisis: The euro-zone countries must regain the confidence of the financial markets. But that is only possible if they clean up their budgets.  Only when deficits have declined significantly will the — regulated — financial markets regain stability. Only under these circumstances will large investors — banks, insurance companies and pension funds — start buying European treasury bonds again. They, and not the speculators, against whom the political world has declared war, are the ones that truly move the markets.

Indeed, as the editors of The Local  point out ("Euro crisis stokes inflation and debt fears")  "A whopping three quarters (76 percent) of the 1,000 people surveyed by Stern magazine said they were worried Germany would not be able to get its national debt under control. In February, before Greece was teetering on the edge of bankruptcy, only 14 percent of Germans had the same fear."

The good news is that, after putting off the inevitable for far too long, many European players are now taking bold steps to deal with the fundamentals.   Spiegel ("Italy Joins Europe’s Wave of Belt-Tightening") reports:

Italy’s government approved a €24 billion ($30 billion) austerity package Tuesday evening, less than two months after Prime Minister Silvio Berlusconi claimed his country could survive the euro crisis without drastic cuts.


The cuts follow similar austerity measures in Spain, Portugal, and Great Britain. Germany, after backing a massive €750 billion package of loans to ensure other EU governments can meet their debt payments, will have to decide in June how to slash €3 billion from its own budget.

The aim is to save the euro’s currency union from breaking apart despite pressure from financial traders skeptical of debt and deficit levels in Europe.

"It’s absolutely necessary to do our part for Europe; to contribute to the financial stability of monetary union and to economic growth," Italian President Giorgio Napolitano said on Tuesday in Washington.

But early reaction from economists was positive. "The combination of these austerity measures with even a mediocre improvement in growth should be enough to bring the deficit below 3 percent of GDP by 2012," said Deutsche Bank economist Gilles Moec, according to Reuters.  "The fairytale is over," wrote La Repubblica, a pro-opposition paper, on Wednesday in reaction to the government’s about-face.

 Ralf Beste, Christian Reiermann and Merlind Theile of Spiegel note ("Germany Tries to Plug Gaping Hole in Its Budget") that Merkel, in particular, faces "an enormous challenge."

The German government faces an ongoing gap of €75 billion ($93 billion) between what it takes in and its expenditures, something that economists refer to as a structural deficit. Contrary to previous assumptions, this deficit has risen by another €5 billion because projected tax revenues have turned out to be lower than expected, as the most recent forecast by the relevant experts showed. The need to cut costs is growing, partly as a result of the new "debt brake" or debt ceiling provision that has been incorporated into Germany’s constitution, which will require Merkel and Schäuble to reduce the government’s budget by an additional €10 billion a year between now and 2016.

The task of putting together the budget is more difficult than it has been in years, and not just because of the sheer magnitude of the necessary austerity package. The success of Merkel and Schäuble’s efforts will be critical to nothing less than the fate of the CDU/CSU-FDP coalition government and, even more importantly, the stability of the euro.

The chancellor wants to set an example for Europe on how best to cut costs. She wants to prove that the German debt ceiling works, and she wants to finally go on the offensive with her quarreling coalition, after weeks of defeats, flops and failures.

A tall order, indeed.

James Joyner is managing editor of the Atlantic Council.

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