December 3, 2011
The end is nigh. Olli Rehn, the European economic commissioner, says the euro zone has ten days to save itself (so what exactly will happen on December 12th?). Radek Sikorski, Poland’s foreign minister, says he fears German paralysis more than German power (or Russian missiles). Barack Obama says the euro zone poses the greatest risk to America’s well-being. Having once spurned the IMF, euro-zone leaders beg for its help. In European chancelleries the talk is of who should be the elect ones. Will it be the 27 members of the EU, or just the 17 that are in the euro zone? Or, if even that is impossible, could the six AAA-rated members of the euro zone bind themselves together?
It is time, in short, to repent. But what is the original sin? For Germany, it is over-indebtedness. Although troubled countries can be helped, real salvation must come through individual actions to reduce deficits, repay debts and boost competitiveness. Germany also wants a new covenant: EU treaties must be changed so that national budgets are scrutinised by Brussels, with powers to impose “automatic” sanctions on countries that stray. This would be backed up by the European Court of Justice. The Germans think only a treaty commitment and the power of the judges will ensure that vows of discipline are honoured.
Nobody denies that they have a point. But most also think that the sinning is more widespread than that. Germany itself was one of the first to breach the stability pact’s ceilings in 2002-03. For every irresponsible borrower there is a reckless lender (often a German bank). Excessive deficits for some imply excessive surpluses in others. The euro’s design was flawed, without fiscal integration or a central bank to act as a lender of last resort. If so, what is needed is greater mutual support: joint Eurobonds to mutualise at least some of the debt, as suggested by the European Commission, and perhaps a change to the statute of the European Central Bank (ECB).
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