By The Washington Post
Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France submitted a plan to address the euro-zone debt crisis to European Council President Herman Van Rompuy on Wednesday. Will this proposal succeed where others have failed?
The answer begins with a description of the problem: The 17-nation euro zone is not an optimal currency zone. It has neither a mobile labor supply, to smooth out regional differences in wages and productivity, nor a common treasury, authorized to issue mutually guaranteed debt, to compensate for varying regional business cycles. The European Central Bank is not a true lender of last resort; each state handles bank regulation, and there is no joint bank-deposit insurance program.
The euro zone tried to get by with members’ promises to keep budget deficits under 3 percent of their gross domestic product and total debt below 60 percent of GDP. This proved unenforceable. But it’s not a simple issue of profligacy by Greece, Italy, Spain and Portugal, though all four, to varying degrees, have mismanaged their affairs. Rather, the flip side of an uncompetitive Southern Europe is a hypercompetitive Northern Europe – Germany especially whose trade surpluses were recycled in the form of loans to the south. This unsustainable imbalance, eerily like the one that has developed between China and the United States, is the root of the crisis. And it explains why Europe’s problems can never be solved solely through austerity in Southern Europe.
The latest Merkozy plan is more substantial than previous iterations; it proposes the first steps toward genuine fiscal union. Specifically, each member state would have to incorporate the deficit and debt targets into its national law and to accept Europe-wide enforcement of those commitments, including sanctions. The reward would be short-term access to Germany s money, via accelerated deployment of a permanent European bailout fund and other means.
The idea, apparently, is to get agreement in principle at a Friday summit Union leaders, then put the necessary legal changes on a fast track for ratification by the 17 euro-zone members, to convince both German taxpayers and the European Central Bank that they can safely prop up the debtor countries through the next few months.
Obviously, this leaves a lot to be negotiated.
Even if all goes according to plan, Europe would have traveled only part of the way to meeting the conditions for a stable single currency.
The best-case scenario is that Teutonic tough love produces higher economic growth in the debtor countries before financial markets, not to mention the people of those countries, run out of patience. The worst-case scenario – bank runs, serial national defaults and prolonged depression in Europe, with global spillover effects – is too awful to contemplate.
The Washington Post