Wall Street Journal Europe
February 7, 2011
by Irwin Stelzer
When "the European Project" was conceived a goal was to contain Germany—create a European Germany as an alternative to the other possibility, a German Europe.
For a while it looked as if the founders had succeeded, especially when they created the euro as the most important step toward the replacement of nation states with a European Union, or at least a euro zone. Then came the financial crisis in the periphery countries, and the emergence of Germany as the principal source of funds to prevent (postpone, or conceal, would be more accurate descriptions) the restructuring of the debts of Greece, Ireland, Portugal and perhaps Spain and Italy, not to mention Belgium, home of the burgeoning eurocracy, and a nation seemingly incapable of forming a government of its own.
Now, the member states of the euro zone, and indeed the entire EU, are confronting the possibility that their effort to subsume Germany in a united Europe is about to fail, and a Europe dancing to the German tune—a German Europe—is about to emerge. But not before a struggle by several nations to retain what remains of their independence.
After considerable dithering, German Chancellor Angela Merkel, with French President Nicolas Sarkozy protecting her flank, laid down the surrender terms at a summit just before the weekend. Germany will support the financially stricken nations, if they, well, become more German. In return for the cash, they are to adopt Germany's retirement age, abolish the indexation of wages to inflation, copy the policies Germany employed to make its goods competitive in world markets, harmonize taxes across the euro zone if not the entire EU, and set firm limits on the ability of countries to run up debt.
These terms seem to Ms. Merkel a reasonable exchange for what is in essence her agreement to take the debts of profligate countries on to Germany's strong balance sheet. She knows she will pay a price in higher interest rates as the rating agencies factor in these new obligations and risks, some of them already apparent, others lurking in the dark corners of the balance sheets of other nations and their banks. Recall: Greece poured more than a little fudge over its books for years, Ireland refused to admit that its banking system had collapsed, and Spain has yet to force all of its regional banks, or cajas, to clean up their acts and shore up their capital.
True, some of the troubled nations have already capitulated to some of Germany's demands. Spain's trade unions have agreed to push back the retirement age to 67 from 65, and the merger of several cajas has produced banks strong enough to be planning to raise in capital markets €20 billion ($27 billion) of the €30 billion the government says the banks need. (Barclays Capital puts the required capital at €46 billion to €90 billion.) Ireland has doubled its 2011 deficit-reduction target. Some Portuguese banks are forgoing dividends in order to shore up capital, and the government has pushed the retirement age to 65, with increases tied to growth in life expectancies.
All of which Ms. Merkel recognizes and approves. But she wants more, much more: an end to restrictions on new business formation; an end to budget gimmickry that conceals deficits; reform programs that permit the stagnant economies of Greece, Portugal and Spain to contribute to European growth. In short, adoption of what has come to be called a program for competitiveness.
Here's the odd part. Most countries profess broad agreement of the need for reforms along the lines Germany is demanding. Yet when confronted with the German-French package—the French have always favored some form of centralized economic management of the EU, including strict regulation and heavy taxation of the financial services sector that is centered in Britain—they balked.
Austria, with one of the lowest effective retirement ages in the euro zone, won't go along with an increase in the retirement age. Portugal won't buy into the end of wage indexation with inflation because it wants to offer a sop to public-sector workers whose wages have been cut by 5%. Neither will Belgium, Spain and Luxembourg. All in all, almost 20 countries at Friday's EU summit objected to the Germanization of their countries for one reason or another. So Germany refused to sign on to an increase in the size of the euro-zone bailout fund. "It was truly a surreal summit," commented Yves Leterme, Belgium's prime minister.
The failure to agree resulted in two by-now familiar reactions by the eurocracy. Another summit meeting in March was added to the one originally planned. And the linguistic spin machine was turned on. Anticipating difficulties in reaching agreement, French Finance Minister Christine Lagarde objected to the idea that what is in fact being contemplated is a "transfer union" to funnel money from richer to poorer countries in return for agreements on spending cuts. "If you start to use certain concepts and words, it begins to infuriate some people," she said. Indeed. "The idea we have isn't to impose the same thing on everyone," added her boss, after pressing to do just that.
All that was intended at Friday's meeting, said one of the EU leaders, Herman Van Rompuy, was to discuss "a procedure" for reaching agreement, rather than reaching an agreement. The bond markets should find that very comforting after being treated to a week of leaks that agreement was nigh.
On to March, and the dual summits at which another effort will be made to strike what has been heralded as "a grand bargain." Or at least to announce that something that will be called such a bargain has been struck.
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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