German chancellor Angela Merkel is spending this weekend the way she spent the last two—struggling through an election. This weekend, her Christian Democrats will get drubbed in Berlin, as last week they lost 4 points off their previous tally in Lower Saxony and the week before they failed in Mecklenburg. Her Free Democrat coalition partners are doing even worse—leader Philipp Rösler lives in Lower Saxony himself, yet the party fell below the hurdle required to qualify for parliamentary seats. In Mecklenburg, the FDP got fewer votes than the neo-Nazis.
Merkel’s problem is that her country is trapped sharing a currency—the euro—with a lot of nations that have overborrowed: Portugal, Ireland, Italy, Greece, and Spain. Not all of the so-called PIIGS countries are corrupt, and not all of them are profligate, although Greece is both. What they all have in common is that they had no business borrowing for the past decade at the low interest rates appropriate to a sluggish German economy that was simultaneously rebuilding East Germany’s Communist wreckage and reforming West Germany’s leviathan welfare state. Now all of these countries are flat broke or near it. Greece’s three-year bonds carry a yield of 172 percent. And the solution that they and the leaders of the European Union in Brussels are suggesting is that all of them should be dealt out a piece of Germany’s massive current-account surplus, its sterling savings rate, and its triple-A credit rating, preferably through the creation of a common “Euro-Bond.”
Merkel cannot say no. She leads the country whose arrogant un-neighborliness the European Union was set up to abolish. But she cannot say yes without violating the law and colluding in the looting of the people who voted her into office. So she and her government are in the position of a man who yearns to get divorced but has religious scruples against it. The Germans are saying things they hope will provoke their European “spouse” to file for divorce herself. The country’s European commissioner, Günther Oettinger, suggested that the flags of the continent’s Schuldensündern (or “debt-sinners”) be flown at half-mast. Rösler has called on Germans to prepare for Greece’s “orderly default.” Finance minister Wolfgang Schäuble has urged austerity on Germany’s neighbors and suggested that European integration continue only “as long as this process is legitimized by a strong democratic mandate.” (In other words, he wants it to continue in theory but not in practice.) Horst Seehofer, the head of Merkel’s Bavarian coalition partner, the Christian Social Union, probably spoke for most Germans when he pronounced himself opposed to more integration of any kind. Maybe that’ll push the old lady over the edge, and I’ll be a free man again.
Over the summer, things have gone from bad to worse in the eurozone. The two austerity programs imposed on Greece in the last year and a half are failing. Greece collects 37 percent of its gross domestic product in taxes and shells out 53 percent in benefits, leaving its government 16 percent in the hole. Only one other government in the West has been so reckless over the past three years, and that other government happens to control the Federal Reserve and can print the world’s reserve currency.
Greece has been able to borrow money from its European brethren in two massive, hundred-billion-dollar tranches, but the austerity programs insisted on as a condition for that aid have been less popular. The bevy of new taxes suggested—like the property tax dreamed up suddenly last week—aren’t working because they are driving growth down way below projections. The savings agreed on—such as the firing of 7,500 state workers and the selloff of $70 billion in state assets—won’t work because the Greeks are too divided to carry them out. And wary AAA-rated Northern European creditors have made their participation in this bailout contingent on the Greeks’ obeying these conditions to the letter. The Finns have demanded collateral out of privatized assets. The Austrian parliament has put off until later this fall its vote on whether to pay up the country’s share of last summer’s rescue package. Greek workers, having borrowed and spent with abandon ever since their admission to the eurozone, now march against privatization plans with the defiant boast that their country is “not for sale.” A different society—one that was capable of, say, forgoing vacations for two years—might be able to right its fiscal ship. But Greece is going broke, and there ain’t no two ways about it.