Wall Street Journal Europe
February 28, 2011
by Irwin Stelzer
If wishes were horses, beggars would ride. As true now as it was when chanted in 16th-century nurseries. Which is why the new Irish government and the old Greek one had best not saddle up. Their beggars' wishes for better bailout terms just don't seem certain to turn equestrian transport into a brighter future.
When euro-zone policy makers gathered on Feb. 4, they once again took the opportunity to miss an opportunity. Instead of signing on to the grand bargain that German Chancellor Angela Merkel and French President Nicolas Sarkozy had crafted, they could only agree to meet again—the now-usual conclusion of these meetings. And to meet not once in March, but twice, determined to strike a grand bargain, a "competitiveness pact," that will give Germany enough control over member-state finances to allow Ms. Merkel to agree to more and bigger bail-outs.
En route to those meetings several new stumbling blocks to a deal emerged. The first was the failure of the G20 meeting to produce an agreement on how to eliminate trade imbalances—how to get the surplus nations to adopt policies that would encourage domestic consumption and reduce reliance on exports. Germany is Europe's China, a nation building its exceptional prosperity by operating a massive export machine. But its 16 euro-area partners need Germany as a market for their goods, rather than as a seller of German products to their consumers.
In the pre-euro era, they would devalue their currencies to make German goods dearer and their homemade stuff cheaper. That was then and this is now. No such mechanism is available to struggling Greece, Ireland, Portugal, Spain or Italy—they gave up the ability to revalue their currencies when they ditched them in favor of the euro. All they can do now is hope that Germany adopts policies to encourage domestic consumption, and reduce their own deficits by taxing and cutting spending, rather than by adjusting their exchange rates to reflect the lack of competitiveness of their economies.
The second new stumbling block to any agreement emerged in Hamburg, where Ms. Merkel's center-right Christian Democratic Union was handed what the chancellor called a "bitter defeat," the German equivalent of President Barack Obama's folksier, "shellacking." Her party's share of the vote fell in half, to 22%. That was due to purely local issues, some 80% of the voters told pollsters. But Ms. Merkel can't be certain that resentment of bailouts did not play a part, and would not in upcoming elections, the next due to occur in Baden-Württemberg, a CDU stronghold, just two days after the conclusion of next month's euro-zone summit. Ms Merkel knows her core voters will not defect to the opposition Social Democrats, but if she is seen as overly solicitous of the needs of nations Germans see as partying profligates, large numbers of them just might stay at home. Recall: it was Ms. Merkel who not so long ago told her supporters that the legendary "Swabian housewife" would know how to advise policy makers, "You cannot live beyond your means in the long run." That is what the broke nations tried to do, and that is what she is being asked to help correct by, in essence, making Germany's balance sheet available to them.
Of course, there is more than a slight whiff of self-interest in Ms. Merkel's seemingly Europhilic stance. In public she reminds Germans that if the euro fails, the European Union fails. That frightens those Germans who believe their history requires them to be subsumed in a large Europe if they are not to be tempted once again to, er, play an overly overbearing role in European affairs. But in private she does a bit of arithmetic. For one thing, German banks would be hurt if Greece, Ireland, Portugal and Spain decided to give their creditors haircuts—pay off debts with a few euro cents on the euro. For another, German businesses appreciate the fact that the Club Med countries can no longer devalue their currencies as an offset to Germany's cost and quality advantages. They know that were the euro to pass into the dustbin of history, and the deutsche mark to reappear, it would be at an exchange rate that would stall the export machine.
Another bump on the road to the Merkel-Sarkozy competitiveness pact is the third review of the Greek Economic Adjustment Program, released before the weekend. Not surprisingly—to do otherwise would have brought the entire bailout structure crashing down—the European Commission concluded that Greece is entitled to receive the next tranche of loans—€10 billion ($13.7 billion) from euro-area members and €4.1 billion from the International Monetary Fund. But the report points out that "a number of important hurdles have emerged," including a continued inability to collect taxes, and rising non-performing loans and deposit outflows at the nation's banks. "The third review sounds definitely less positive than the previous two…," conclude analysts at Citigroup Global Markets.
Finally, the replacement of Fianna Fail by a Fine Gael-Labour coalition pledged to renegotiate the terms of Ireland's bailout will be taken by many Germans, perhaps including Ms. Merkel, to mean that the Irish cannot be counted on to keep their word. With the Greeks also asking easier terms than first agreed, it seems a deal is not really a deal after all. So why throw good credit after bad?
All of which surely has the eurocracy wishing that it had struck a deal earlier this month, when the road to agreement was somewhat smoother than it has become.
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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