How much hope for the euro with Merkel still in charge?

Chase Gummer writes yet another glowing piece about Angela Merkel, though he relies a lot on a "some people say this, others say something else" style that at least surfaces some of the real problems with her policies: Angela Merkel's Boring Brilliance The American Prospect 09/26/2013. He writes:

Politically she moves at a snail's pace, but always aims for the center, gradually nudging her conservative party considerably leftward on the domestic front, refusing to lower taxes and keeping generous social services in place, and remains open to a more moderate position on social issues like gay marriage. On the European stage, Merkel's waiting game has been fraught with greater risks, but so far, her calculations have kept the euro from blowing up. She remains practically the sole arbiter over the fate of Europe. No sudden moves, no grand gestures, just nail-biting and a lot of plodding through murky, backroom deals with other European leaders. For the German tabloid press, she’s the Eiserne Mutti ("the iron mommy") that the debt-ridden southern Europeans fear and cost-conscious northern Europeans love, staying the course come what may.

However, for many observers, Merkel's steady hand is part of Europe's problem and the very reason why Merkel is the center of attention; half measures and inaction have drawn out the euro crisis longer than it should have. Just as austerity has slowed down the American economy under a Republican-controlled house, Germany has precluded any recovery in the southern European countries like Greece, Portugal, or Spain by Germany's insistence that the public sector save rather than expand, which has led to record high unemployment. Merkel's decisions move markets precisely because she and her government haven't found a sustainable solution to the problems of the euro other than crisis management.

Martin Wolf explains what Gummer's "precluded any recovery" actually means (Germany’s strange parallel universe Financial Times 09/24/2013):

So where is the eurozone? Its unemployment is 12 per cent. Its gross domestic product in the second quarter was 3 per cent below its pre-crisis peak and 13 per cent below its pre-crisis trend (see chart). In the most recent quarter, Spain’s GDP was 7.5 per cent below its pre-crisis peak; Portugal’s, 7.6 per cent; Ireland’s, 8.4 per cent; Italy’s, 8.8 per cent; and Greece's, 23.4 per cent. None of these countries is enjoying a strong recovery. The latest unemployment rate is 12 per cent in Italy; 13.8 per cent in Ireland; 16.5 per cent in Portugal; 26.3 per cent in Spain; and 27.9 per cent in Greece. These would be higher without emigration. Ireland’s plight is a warning: it has long since restored its competitiveness and is running a large current account surplus. Yet its GDP has stagnated for four years.

So, yeah, I guess you could say that Merkel's policies have "precluded any recovery" in those countries!

Wolf's piece is on the wonky side. But he gives an explanation of how Germany has benefited from those bad economic conditions in the other countries in the eurozone:

Yet a large country with a huge structural current account surplus [like Germany has] does not just export products. It also exports bankruptcy and unemployment, particularly if the counterpart capital flow consists of short-term debt. That the new macroeconomic imbalances procedure avoids recognising the role of Germany’s shortage of domestic demand is most revealing. The benchmark for concern over a current account surplus is 6 per cent of GDP, regardless of the size of the country. Germany's average turns out to be exactly 5.9 per cent. [emphasis in original]

I would add here that the current account deficit rule of thumb he mentions there does not apply to the United States as long as the dollar remains the world's reserve currency.

Wolf rightly says that Merkel's euro policy have actually been an "attempt to export [Germany's] difficulties via beggar-my-neighbour policies." And he doesn't think the eurozone can hold together under the current policies, most immediately Merkel's brutal austerity policies for those countries. Absolutely critical to saving the common currency is that "its members to return to economic health over a reasonable time period."

Wolf also provides an explanation on why the arrogant demand by Merkel's government for all other eurozones to become like Germany, an export-oriented economy, are spectacularly misguided.

Dieter Wermuth provides charts on unemployment and youth unemployment for France, Germany, Greece, Ireland, Italy, Portugal and Spain, plus one for the eurozone as a whole in Euro – Zeit für einen ausgewogeneren Policy Mix Die Zeit Herdentrieb 26.09.2013. "Insgesamt haben wir es mit einer sozialen Katastrophe zu tun," he writes. ("Altogether we're dealing with a social catastrophe.")

The overall GDP for the eurozone is well below their production potential trend line, which means that with adequate demand instead of pro-cyclical, demand-suppression austerity policies, the crisis countries have major growth potential. But Europe - read: Angela Merkel - is insistent on controlling deficits and maintaining austerity policies. Wemuth comments: "Aus Angst vor dem Tod begehen die europäischen Politiker Selbstmord." (The fear of death is driving the European politicians to suicide.") The metaphorical "suicide" here, though, is a collective one, not evenly shared.

That's what the alleged centrist of Angela Merkel that some many commentators are breathlessly praising has led to. And without a drastic change in her policies, it's hard to see how the euro can be saved.

Tags: angela merkel, austerity economics, eu, euro, european union