December 18, 2012
Today I plan to ask a simple and somewhat rhetorical question. It relates to the recent movements in the eurozone crisis and their relationship to German politics.
If you have been following the eurozone crisis, you might have noticed that the pressure on Greece seems to have eased. A few months ago it seemed to be a near certainty that they would not receive their next tranche of money and, well, who knows where that might have lead to … a Grexit perhaps?
Yet in recent weeks the talk of a Grexit has dropped. This might be because the politicians that kept mentioning it have managed to frighten the Greeks enough to get their way and now don’t need to brandish that stick for a while. However, it might be for other reasons.
One of the very plausible reasons is that there will be elections in Germany next year. Postponing major decisions until after the elections is seen as preferable. Of course it is. In his recent Project Syndicate column, Nouriel Roubini describes the situation very well (here). The question is, since there will be anywhere between tens and hundreds of billions of euros at stake, how much is postponing any major decisions really worth? If we think back to the first Greek bailout, it is now a near universally accepted truth that the delay in German decision making cost billions of euros.
A political agreement is not an agreement
One of these decisions is the banking union. There is near complete agreement that breaking the bond between banking debts and the balance sheet of sovereigns will be a very big help. It may not end the crisis, but it ought to be a big step in that direction. Since a ‘political agreement’ was made at the European summit, the definition has slowly changed and as people think about it more, the idea has been watered down until there might be little or nothing left. (I wrote about this recently (here) and it appears to me that there has been little or no forward motion since then).
The dirty secret appears to be that there are some big problems in many German banks. It has been easy for some politicians to criticise bankers in other countries, such as Spain, but if they have to look too closely at home, there might be some nasty surprises. If this is news to you, read this.
Movement beats meditation
I offer you three reasons as to why Europe cannot wait for Angela.
The first reason is that postponing economic decisions until after political elections makes little sense in an EU context. Several significant decisions were either postponed or not taken in 2012 because of the potential ramifications at the ballot box. A great example was the potential fall out of the elections in Catalonia a few months ago. The problem is that in a 27 member state union, there will always be elections just around the corner somewhere. Rather than try and hide from that fact, it is a fact of life and should be considered.
Secondly, the major failing of the euro is that it is a political construct. I am a firm believer that it was a political masterstroke at the time, but as we have seen, it has proved to be an economic albatross. Depending upon your perspective, this may be proof that making economic decisions for political reasons is not guaranteed to be successful. The euro was at least a shared political decision. If progress in resolving the euro crisis is to be on hold for some months, should it be on hold just to help Angela Merkel’s political career?
I cannot speak for the German electorate, but it seems like a lot of money to spend to preserve just one career, or at best one party, especially when there are so many unemployed people across the EU.
Thirdly, I think we ought to consider value for money. After her experience in recent years, Angela Merkel may well be the most experienced person in the world at dealing with the eurozone crisis, however, if the impact of keeping her in position is in the tens of billions range (or more), I think it might be possible to use a little of that money and buy in some extra talent – just like a football team would. If there is going to be so much at stake (and given the situation in Spain and Italy, it is many multiples of this) then we need to be thinking about a dream team and not just the Merkel and Schauble show.
How much would it cost to bring in Martin Wolf, Nouriel Roubini, Paul Krugman, Wolfgang Munchau, Kenneth Rogoff and a few others to be the brains behind the operation? (Yes, I am talking about having economists try to solve an economic problem rather than politicians). It doesn’t really matter how much they charge, it won’t be billions, so the impact they can have ought to still be value for money, even if they charge multiple millions of euros.
Therefore, I come to my simple rhetorical question…
Can the citizens of Europe afford (financially or otherwise) the potential impact of postponing progress in the eurozone crisis until after the German elections?