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Cameron to Eurozone

Drop dead

Dec 26, 2011, Vol. 17, No. 15 • By IRWIN M. STELZER
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n the growth-stifling ratcheting up of taxes on consumers (VAT has been upped to 23 percent in Italy and Greece), property owners, “the rich,” and assorted geese deemed ready for plucking; 

n the structural impediments to growth that have driven youth unemployment to 48.9 percent in Spain and are driving many eurozone countries into recession as they respond to their German paymasters’ insistence on austerity, with no offsetting growth program; and

n the inability of noncompetitive countries to devalue their currencies or to organize orderly defaults, so as to set the stage for some kind of economic growth. 

There are more, but you get the idea. The EU is unlikely to be a driver of global growth in the foreseeable future. Meanwhile, the eurozone’s leaders hunt for a solution to their more immediate problem: the inability of Greece, Portugal, Spain, and, most important, Italy to roll over their debts on sustainable terms, an inability that just might bring down the European banking system.

In response to these problems the summiteers two weeks ago came up with close to nothing, unless you count the usual brimming-with-self-satisfaction communiqué. Countries exceeding structural deficits (excluding the effect of booms and busts) of 0.5 percent of GDP will be subjected to an unspecified “automatic correction mechanism,” which can be made nonautomatic quite easily by vote of eurozone members, each knowing that if it allows outside enforcement of a member’s finances it might be next in line for discipline. Each nation is to adopt a constitutional amendment requiring a balanced budget, or some similar rule, but there is no enforcement mechanism. If a country’s deficit exceeds 3 percent of GDP there will be undefined “intrusive” measures, although these will not be put in place if a qualified majority of members decides to defer action. Keep in mind that the long-forgotten Stability and Growth Pact, which was supposed to guard against excessive borrowing, had a similar requirement, but when both France and Germany pierced its 3 percent deficit ceiling, discretion was seen as the better part of valor by member nations, and no action was taken against the Franco-German profligates. 

Most important, the variety of bailout mechanisms agreed to are woefully underfunded when compared to the enormity of the debt burden with which they are supposed to cope. For example, it was agreed that $261 billion in loans would be made to the International Monetary Fund (source of funds unspecified), which would in turn use the money to support the borrowings of stricken countries. Compare that sum with Italy’s external debt, now in excess of $2.4 trillion. Hopes that China would fill Europe’s begging bowl have been dashed by the Chinese, eager for influence but not notable squanderers of their newfound wealth. Worse still, it turns out that the IMF cannot put these funds, if they do materialize, into a lock box for use by the eurozone: The money must go into a general fund available to any needy country. Throw in the stated opposition of the Bundesbank, and what we have here is a dead parrot.

Merkel had her way on two important points, both of which rattled already panicked investors. The European Central Bank will not be turned into a lender of last resort, with the power to buy the debt of sovereign nations and print money to pay for those purchases. The Germans have an abiding fear of inflation for reasons obvious to any student of history, and this is an area in which history really matters in Germany.

Nor will there be eurobonds, guaranteed in part by Germany, or the creation of a transfer union that would allow German riches to flow south as, for example, the riches of Texas flowed north to Michigan when the rust belt was at its lowest ebb and the oil business was booming, providing tax revenues to cover the unemployment benefits being racked up by laid-off Detroit auto workers. When German voters were persuaded to trade their hard, sound, beloved deutsche mark for the newly printed and minted euro, they were promised that no such raid on their balance sheet and wealth would be permitted. That history matters, too.

The big winner in all of this was Nicolas Sarkozy, who successfully resisted Merkel’s efforts to have Brussels act as enforcer of rules against excessive borrowing. Facing a tough reelection campaign, and already charged with ceding too much sovereignty, the French president succeeded in preserving the authority of each nation to react to the objections of Brussels to its budgets, taxes, and spending. Merkel had wanted to have the existing EU treaty revised to give that power to multi-national institutions in Brussels so that it would not seem as if Germany, already hearing cries of a “Fourth Reich,” were seeking to dominate the countries of Europe. 

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