A lot of intelligent money people think this is make-or-break week for the euro. They say that by Friday, December 9, either there will be a path toward resolution of Europe’s debt crisis, or events will accelerate toward a breakup of the single currency. One such is Morgan Stanley analyst Arnaud Marès, who has a record of being right about Europe when others were wrong. He wrote in a recent memo that we are at a crossroads between a “debt jubilee” (a massive repudiation of debt) and “debt assumption” (in which the EU would take up responsibility for the debts of its formerly independent constituent states, much as Alexander Hamilton convinced the United States to do in the years after the revolution).
Whether or not Marès and others are right, Europe’s leaders are behaving as if they are. By “Europe’s leaders” we mean not any Brussels committee but its de facto leaders—Germany’s chancellor Angela Merkel and France’s president Nicolas Sarkozy. For Europe to get out of its mess, the two will need to agree. As has been the case for decades, Germany has the economic might to stabilize the eurozone, even if it does not have the might to support it in the style to which it is accustomed. France has . . . well, France doesn’t have much, but is a large enough country to credibly pass off Germany’s plans for Europe as its own. This is necessary if Europe’s smaller countries are to be kept from grumbling overmuch that German fiscal discipline is accomplishing what the Wehrmacht failed to 70 years ago.
Why is everyone worrying the euro will blow up just now? Well, Nietzsche used to say: “Whatever does not kill me makes me stronger.” A reverse of that principle applies in a financial crisis: Any plan that does not solve it once and for all makes it more dangerous. Europe has had several such plans of late. A bit more than a month ago, the European Financial Stability Facility—the bailout fund of several hundred billion dollars that the member states had pitched in to establish—seemed to be running out of firepower. It had been meant to protect Greece from speculators, and now it had to protect the entire southern tier of populous and heavily indebted countries. The Europeans decided to “leverage” the EFSF. In plain English, this means borrow off it. In equally plain English, potential lenders—from U.S. hedge funds to the Chinese government, with its trillions in U.S. dollar reserves—told the Europeans to take a hike.
Once it became clear that Europeans could no longer so easily borrow fresh money to pay back old lenders, then lending to Europe’s in-the-red countries—like Italy—began to look more dangerous. People with a lot of money to invest began charging a higher premium to invest it in Italian debt. That created an exponentially more serious crisis. Last week, all of the major central banks in the developed world—including the Federal Reserve, the Bank of Japan, and the Bank of England—joined forces to offer illiquid European banks readier (and cheaper) access to dollars. The dollars will be swapped for euros and then swapped back when things calm down—that is, assuming nothing bad happens to the euro in the interim. That ought to get the continent to Friday, anyhow.
You can’t have a currency union without a political union. So if Europe is going to stick together, either the currency will change to fit the politics or the politics will change to fit the currency. Roughly, France wants the former and Germany wants the latter. France envisions a Europe bailed out mone-tarily. France wants to keep its sovereignty and gloire, backstopped, if necessary, by a central bank that spends like a drunken sailor. Killing off the Bundesbank, with its culture of strong money, and replacing it with a more easygoing monetary authority was a longstanding French goal. François Mitterrand thought he had achieved it with the Maastricht Treaty in 1992, but today many Frenchmen think the Germans outwitted him.
Germany envisions a Europe bailed out fiscally. The warnings against lost national sovereignty that you hear issuing from London and Paris are not audible in Berlin. Forgoing the usual prerogatives of sovereignty is the price that Germany has paid for readmission into the family of civilized nations. Its nonexercise of autonomy has become a habit. With little sovereignty to lose, it doesn’t care if the other nation-states of Europe join it in the exurbs of history. It just wants hard enough money so it can enjoy its appliances in peace.
Angela Merkel, speaking before the Bundestag last week, promised to move the continent toward a fiscal union. She showed the same Ahab-like obsessiveness in her tone that Barack Obama did at the height of the health care debate—leaving the impression that a ruinous deal would be better than no deal at all. “We are not just talking about a fiscal union but beginning to actually create one,” she said.