Wall Street Journal Europe
April 1, 2010
by Irwin Stelzer
If he had really meant what he sang, Noel Coward would be very unhappy that so many are being beastly to the Germans merely because chancellor Angela Merkel doesn't see any reason to bail out Greece. Or to take steps to reduce her country's competitiveness and its trade surplus.
After all, Germany bit more than a few bullets to get where it is: wage restraint by trade unions, budget restraint by the government, fewer welfare goodies than its southern euro-zone colleagues were doling out, paid for with borrowed money. Don't look to frugal Germans until after you agree to an International Monetary Fund austerity program, is Ms. Merkel's message to euro-zone bureaucrats, Greece, Portugal and whichever other country will come knocking on her door. Then, and only then, and only after a unanimous vote of euro-zone member states, will she contribute to coordinated bilateral loans. That's a bit of a retreat for her, in response to pressure at last week's EU summit. But a tactical retreat only.
European Commission President José Manuel Barroso sounds appeased, but only slightly, because Merkel has stalled bail-out efforts into some indefinite future. He says the commission believes "determined and coordinated action" in support of Greece "is needed now", and makes it clear that his remarks are aimed at Ms. Merkel, who sees no such urgency.
Never mind that she was the chief supporter of his successful bid for a second term: if you want loyalty, buy a dog, as we say in Washington.
Lorenzo Bini Smaghi, an executive-board member of the European Central Bank, is even angrier. He took to the German press to oppose Ms. Merkel's call for intervention by the International Monetary Fund. He told Die Zeit, "Resorting to the IMF can be detrimental to the stability of the euro" and its image. He lost: Ms. Merkel will go along with a bailout only if the IMF is a major participant.
But the fuss about a bailout is really a side show. The fundamental problems are two: Germany's huge trade surplus, and the lack of central control of individual euro-zone members' fiscal policies.
Germany's trade surplus within the euro zone keeps less efficient countries such as Greece in deficit, while its surplus with the rest of the world keeps the euro higher than it would otherwise be, making it more difficult for its partners to compete in world markets. That problem cannot be solved until the noncompetitive, profligate members get their labor costs down and their productivity up.
The problem of enforcing the agreed 3% limit on deficits is even more difficult, as its solution involves the surrender of some sovereignty. Rather than confront this intrinsic flaw in the euro system, there is a tendency to emulate the ostrich. One top EU official told me that the problem has been caused by U.S. hedge funds and the anti-EU media.
Believe that—and many EU officials certainly do, especially after several hedge fund operators dined together in New York to trade ideas about the situation—and you can contentedly sit at the next commission meeting believing that if the big, bad hedge funds can be reined in, and the press muzzled, all will be well. Greece will get its budget deficit down from 12.9% to 3% in a relatively few years, Spain's regional and central governments will go through with plans to cut the nation's deficit in half by 2013, and Portugal will reduce its deficit from 9.3% of GDP last year to 2.8% by 2013. Oh, and you would have to believe the optimistic growth forecasts that underlie these projections.
Thoughtful euro-zone executives, even those who believe a papering-over might get them through this crisis, are considering a range of more durable reforms. One is the establishment of some sort of central review body with the power to fine or otherwise discipline countries that let their finances run wild. Another possibility is the bifurcating of the euro into a eurosud and a euronord—to permit the southern countries to devalue.
But even such moves would merely avoid the problems that, in the words of a recent report from the European Commission, have kept European growth "lower than that of our main economic partners, largely due to a productivity gap that has widened over the past decade."
Low expenditures on research and development, and a "less dynamic business environment" are cited as major villains. The injection of dynamism would require major labor-market reforms to increase mobility between jobs and between countries, dismantling regulations that impede the establishment of new businesses, and reducing taxes to encourage R&D spending and risk taking.
If this crisis is not to be wasted, that is the direction in which a reluctant Europe will have to be dragged.
No one, least of all the markets, is betting that will happen any time soon.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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