Monday, October 25, 2021

Can Merkel keep the euro together?

Last week, Europe celebrated. In any other week, there may have been too much going on, both positive and negative. With threats to financial stability in various countries, the eurozone was not an ideal time to be celebrating, as the Financial Times announced on 20 March in its “17 Countries in Danger” feature, headline above.

The piece forecast that every country would need a bailout in 2012 and 2013. Within the eurozone only six countries’ financial costs would be covered. A number of other countries would see fiscal costs for the second or third time, even if those became more manageable in the long run (for example Ireland). Worst of all, the European Central Bank (ECB) would require effective central bank support to keep the euro zone afloat as the debt crisis threatened further fragmentation of the economy.

In a nod to this threatening situation, the United States’ most eminent economist endorsed the joint currency plans that the EU has so far put in place. “If Europe does not act and get its house in order, other countries will pick up the pieces and throw in their lot with the United States and Japan,” Professor Joseph Stiglitz said in an interview with the New York Times.

However, those concerns vanished as the results of the EU parliamentary elections confirmed that Europe’s peoples and democracy truly have spoken – and their first response was to elect Angela Merkel (the chancellor) and allies. Only rarely in history have such sweeping results been passed by the people in a democracy, but the German chancellor overcame such concerns and values with her newfound mastery of economic policy.

To transform Europe as a functioning market community, particularly one where national governments are now willing to submit to European decisions, the chancellor had to convince elected representatives to submit to policies: she had to get the “big vote” that she received, so as to negotiate instead of veto. She needed to get a majority, so instead of moving away from her principles or watering down her policies, she chose consensus and compromise.

It is still far from clear whether the eurozone can survive the next political crisis – a few months before the French presidential elections. German neighbours France and Greece are on opposite sides of the political spectrum. The leaders of both Greece and Italy, Mario Monti and Matteo Renzi, were defeated at the polls last month. Greece’s PM has proved to be ineffective.

Nevertheless, the results of the second election in Greece show that the austerity policies introduced in Greece in 2010 have produced inflation and recession and that citizens are still opposed to further austerity: more than 56% voted against the political parties that opposed those policies. And that was under a new SYRIZA coalition that did not seek to make them more severe – this is the first time that such an opposition has reached the parliament.

The message is clear: austerity brought about hyperinflation in Greece and that has been reversed in the three years since; the policies pursued by the German government were disastrous and have only made matters worse for Greece and other European economies; that there is a way out; and that cutting more public spending is the wrong response to economic uncertainty.

The fact that voters rejected those policies has not been lost on the German government. But the chancellor’s economic policies, the budget guidelines that Merkel set in 2011, and the austerity plans decided upon by Greece’s euro partners are likely to show very little benefit for the eurozone. Germany and other major EU members, and as much as Paris, are now consciously trying to break apart the economic disparities of the last decades. The idea is that the eurozone can solve its issues without a bailout, through reforms – for example by one euro currency zone nation giving loans to other countries in a lesser-developed area, thus subsidising them and ultimately limiting the benefits available to those countries in Europe.

Eurozone citizens have voted to help break down the historical and international role played by the US and Europe in international affairs, not to help Europe become a larger regional and international market. They may have voted for Ms Merkel and her party, but this has been in two stages: firstly, to restore the common currency, which she opposed; and secondly, to break down the fragmentation of European economies and achieve an open and neutral market.

That all came out fine for them last week – Europe has completed her agenda. Whether it will do so in other areas, we will see.

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