For the common currency to work, the European Central Bank (ECB) would have to be a buyer of last resort of sovereign debt and would have to have economic prosperity and high employment as its official goals, not just low inflation (aka, "hard money", "price stability") as is currently the case; the eurozone would need eurobonds, based on the credit all the combined eurozone countries but whose proceeds could be used by individual countries; and, there would have to be a coordinated budget and fiscal policy that would make the eurozone a genuine "transfer union", in which resources were systematically transferred from the richer countries to the poorer ones, very similar to what happens in the United States among the states.
It's highly unlikely that Germany under Chancellor Angela Merkel would agree to such arrangements in time to address the immediate critical problems of Ireland, Italy, Greece, Portugal and Spain. I'm no currency expert. But given the eurozone's rotten record during this depression, it seems to me that coming up with a way to completely eliminate the euro, to make plans for an "orderly exit", in the current phrase, for not just Greece but all euro participants. That could at least leave the EU itself intact with its trade, regulatory and immigration features. That way, they could work on arranging the features that would make a common currency actually workable without the euro's current fatal weakness during depression conditions.
None of the EU countries are proposing such a thing at the moment. Officially, everyone wants to keep the eurozone together with Greece in it. Keeping Greece on the euro is highly unlikely at this point. But as the politics are playing out, the fight within the EU is focusing on eurobonds.
And the good news is that there is a fight now! Arthur Beesley et al report in Germany and France at odds as euro falls Irish Times 05/24/2012:
At an emergency summit last night in Brussels, the leaders were introduced to the new French president, François Hollande, and Greek caretaker premier Panagiotis Pikrammenos.Angie said no. ECB chief Mario Draghi backed her up with some Euro-jive:
Mr Hollande said he raised the possibility of introducing eurobonds with a common euro zone guarantee as well as the granting of new powers to the European Stability Mechanism bailout fund to directly rescue banks.
He insisted he was not alone in backing eurobonds, long resisted by Dr Merkel, but recognised tough opposition to the notion from leaders he did not name. ...
"It is not for me to speak on behalf of Germany but what I noted is that Mrs Merkel does not consider eurobonds to be an element of growth but as a long-term integration perspective."
For her part, the chancellor said there was a difference of opinion on this topic but said the discussion was very balanced.For the last three years or so, this kind of dancing around the problems has worked well enough for Angie. It has kept the eurozone and its advantages for Germany together. It has provided enough backdoor public subsidies to German and other European banks to allow the EU governments to avoid the serious bank weaknesses that constitute the underlying problem that manifested itself as a sovereign debt crisis. Part of her latest dodge is to talk up the idea of "project bonds", which she's trying to sell as economic stimulus. But her real focus is to try to push through her fiscal suicide pact that neither France nor her own Parliament has yet approved, the treaty that would essentially outlaw Keynesian stimulus in the EU and give Germany effective veto power over the other nations' national budgets. She's been taking a hard line against eurobonds. (Schuldenkrise. Bundesregierung sperrt sich gegen Euro-Bonds Spiegel Online 21.05.2012)
"We spoke differently about eurobonds. I said we need greater economic co-ordination in eurozone and that we see considerable difficulties when we think of the fiscal treaty what possibilities exist to shape the treaties," she said.
On this point she was supported by European Central Bank chief Mario Draghi, who said eurobonds made sense "only when you have a fiscal union".
Mr Draghi said the most important thing to emerge from the meeting was a "commitment to move economic and monetary union to new stages."
Carsten Volkery reports that in the mini-EU summit this week, French President François Hollande stole the show from Angie this time, or at least that's how the headline writer spins it: EU-Gipfel in Brüssel. Hollande stiehlt Merkel die Show Spiegel Online 21.05.2012. Volkery names Austria, Ireland and Italy as countries that are aligning themselves with Hollande against Angie in the eurobond debate, the Netherlands, Finland and Sweden as siding with Angie. It's a little surprising to see Austria named prominently as one of those aligning against Angie, because their Parliament already approved that awful fiscal suicide pact.
Obviously, a big part of the problem with the EU coming to grips with the problem is that the "center-left" social-democratic parties had largely bought into the neoliberal religion of deregulation and general deference to corporate power. I've mentioned that especially since Hollande's election victory in France, the German social democrats (SPD) have begun showing notable signs of life. The SPD's strong performance in the recent state elections in North Rhine-Westphalia represented a serious defeat for Angie, and has shown that a more confrontive stance against Angienomics is popular even within Germany.
But the SPD's performance these last two years really makes me wonder whether they aren't still afflicted by an old ailment, the deference to established social and economic power that made them known as "the Kaiser's Social Democrats" during the First World War. Without trying to even summarize the complicated conflicts in late 1918-early 1919, for the SPD-led Weimar coalition to put democracy on a secure basis, they would have had to have restructured the armed forces, the state bureaucracy, the universities and, at a minimum, placed major democratic restraints on the abuse of private economic power. Despite their formally revolutionary and Marxist official program at the time, they did none of these things. And only the most generous judgment of their performance could give them credit for not making a more serious effort to do so, given the opportunities that were at hand.
Wolfgang Münchau, editor of the Financial Times Deutschland, takes the present-day SPD to task for getting caught in their own overly-compromising and overly-compromised rhetoric in recent years in support of the neoliberal project in Der SPD fehlt der Killerinstinkt Spiegel Online 23.05.2012. In a criticism that will sound all-too-familiar among Democratic progressives in the US, Münchau notes that with Angela Merkel very much on the defensive in internal German politics, it looks like a great time for the SPD to be mounting a distinctive criticism of her policies, her EU policies in particular. But instead, the SPD is pretty much support Angie in her pitch for "project bonds", which could be passed off in PR as "eurobonds".
He also makes the important point that Hollande and the French Socialists at this point are not pitching for the kind of eurobonds described above, which really would need the changes mentioned above to the ECB's role and a genuine eurozone transfer union to work over the long term. Hollande is pushing a hybrid form of eurobond that would be used to pay down some of the sovereign debt of Greece and the other countries currently under most pressure from the bond markets.
But why is the SPD still tagging along behind Angie's obviously failed, disastrously failed EU policies? Münchau suggests a psychological explanation, that the SPD at the national level has lost its "killer instinct". But he puts it in the context of their having excepted neoliberal concepts like "automatic debt brakes" and the unilateral focus of central banks (the German Bundesbank and the ECB) on fighting inflation, no matter what is happening in the real economy.
The problem is that the SPD has spent years now on a Third Way course, selling itself as fiscally responsible and willing to curtail pensions and workers' rights and endorse policies that produce lower wages and salaries, hoping to appeal to those ever-elusive centrist voters. This is the role that left parties are expected to play in the neoliberal scheme. In reality, the dominance of policies like the ones Angie is now pushing onto the eurozone would not be feasible if the large left parties, which in Europe are the social-democratic parties, didn't play along with it in much the way the SPD, the Labour Party in Britain and the Democratic Party in the US have. Instead of building a consensus against deregulation mania and deficit obsession even during a depression, the SPD has joined the Christian Democrats in promoting it. And they are finding it hard to change course rapidly, presuming that the leaders would want to and that they see the need to do so.
Münchau warns that the SPD is on the verge of missing an excellent chance to "break the dysfunctional conservative consensus in Euro-policy" ("den disfunktionalen konservativen Konsens in der Euro-Politik zu brechen"). And he plausibly focuses on the necessary point on which they have to make a stand: Angie's fiscal suicide pact. Hollande has been insisting that France will not approve it without amendments providing for necessary stimulus. Since the whole point of Angie's pact is to prevent governments from pursuing fiscal stimulus even in serious crisis conditions, it's a demand that can't actually be met without gutting the fiscal restrictions in the pact.
Angie is likely to push the confrontation to the deciding point, which will come sometime this summer. If Hollande on France's behalf, and the SPD on their own behalf, seriously want to break with Angie's destruction economic policies, they will have to be prepared to vote this treaty down in their respective Parliaments. They should vote it down just out of plain good sense, because it's a terrible treaty based on a terrible set of ideas.
But this is one of those occasions where very short-term tactical decisions by a few major players could have enormous effects for years or decades to come. The European Union, if it is going to be more than a free-trade zone, has to make a drastic break with Angie's current policies. To save the euro, the break will have to be more drastic and come very fast. Maybe extremely fast in EU-time.
If France doesn't reject the fiscal suicide pact, those chances will not happen anytime soon. The euro currency likely won't survive, with Greece's exit from the euro zone being the first major event in the end of the euro. Defeating the fiscal pact won't force Germany to make the necessary changes. But it's hard to see how it can happen without defeating the fiscal suicide pact.
Angie is likely to go down to the wire insisting that the fiscal suicide treaty has to be approved as it stands. For one thing, that is her style and she's been remarkably successful in it, destructive as the results have been for Europe and the European project. For another, her back is against the wall. Her international coalition with France on EU policy has cracked, and she's under enough political pressure at home that her coalition partner party, the FDP, may bolt the coalition at pretty much any time and force new national elections before the current 2013 schedule. Reversing course on the fiscal suicide pact - which is one thing the FDP does like about Angie's program - would make her even more immediately vulnerable.
That means that for there to be any hope of having big short-term changes in German policy, both the French government and the SPD need to be prepared to vote down the fiscal suicide pact. Will they do that? Or will they pull an "Obama" and cave in to Angie, pleading that she held the EU and euro hostage? This is a decision they will be continually facing over the next few weeks.
Tags: angela merkel, austerity economics, eu, euro, european union, france, françois hollande, greece