Wall Street Journal Europe
November 28, 2011
by Irwin Stelzer
"A shark has to constantly move forward or it dies. And I think what we got on our hands is a dead shark." Woody Allen's description of his failing relationship with Annie Hall is as apt when applied to the euro zone. Tensions within the zone are mounting as we enter a week in which Italy, Belgium, Spain and France plan to tap the markets for some €17 billion ($22 billion) in new loans and, says Goldman Sachs, the European economy slides into recession.
Bankrupt Greece; junk-rated Portugal pleading with Angola for inbound investment; jobless Spain, facing some interest rates that have doubled in the past month; and recovering Ireland have already fallen to the bond vigilantes. Growth-free Italy is fighting a rearguard action, facing unsustainable interest rates despite the stellar reputation of its newly appointed technocrat prime minister, Mario Monti; Belgian debt, now equal to its GDP, has been downgraded, in part because of the inability of this seat of the EU to form a new government. France, consumer confidence dropping, is likely next. Some German IOUs were unsold, and prices of bunds are slipping. No euro-zone country and no euro-zone company can any longer escape the consequences of the structural flaw in the euro-zone architecture.
Nor can countries outside the euro zone. Great Britain, with high deficits, mounting debt, and a deficit-reduction plan that just might not work, retains its triple-A rating because it has its own currency and the rating companies increasingly consider governance when deciding whether to downgrade. Britain is considered governable, but that might change after Wednesday's strike of public service workers shuts down the country.
The failure of the supercommittee to find some trivial deficit reductions means America might also slip into the ungovernable category. And the Federal Reserve Board is imposing new stress tests to determine whether leading banks can withstand a wave of sovereign- debt and bank defaults in Europe.
Pulitzer Prize-winning columnist Charles Krauthammer is not alone in arguing that the euro-zone disease, unless cured, might well turn slow growth in the U.S. into recession, and scupper any chance President Barack Obama has of avoiding a forced return to Chicago in 2013. Which is why Mr. Obama will do more than present German Chancellor Angela Merkel with the Presidential Medal of Freedom when she arrives in Washington Monday evening. He and Treasury Secretary Tim Geithner hope to persuade her to stem the rot. Whether she is prepared to take advice from the team that has driven American deficits and debt to such levels that their nation's debt has been downgraded while Germany's remains triple-A is uncertain.
One thing is certain: The euro cannot survive without a major change in the governance structure of the euro zone. The first prescription for what ails the zone was "austerity", but that has produced recessions and government oustings. Then came the European Financial Stability Facility, but it turns out to be too puny to halt the bond vigilantes' rampage through the euro zone, and anyhow rests in part on France's waning ability to join Germany as a guarantor by retaining its triple-A credit rating.
The European Central Bank, operating within the legal limits imposed on it by the treaties that govern the European Union, is providing some liquidity to the banks and a bit of relief on the interest-rate front for sovereign borrowers, but it cannot do much to prevent the insolvent from being forced to default.
Ms. Merkel, Germany's latest Iron Chancellor, has set her face against any of the measures that might stem the tide that is about to engulf the euro.
She is against allowing the ECB to become the lender of last resort, aka printer of money. She refuses to share her balance sheet with stressed countries by allowing the issuance of euro-bonds, until they reform, even though such reforms cannot be implemented in time to head off sovereign defaults that would take down many under-capitalized European banks, now desperately juggling their books to inflate their capital ratios.
These banks are already suffering from an inability to raise funds as American and other lenders pull their money out, leaving Europe's banks dependent on the ECB for short-term cash. If a credit crunch comes, can recession be far behind?
Cynics say that all of this suits Ms. Merkel. Lenders fleeing from risk put their money in safer bunds, keeping German interest rates low, saving Germany €20 billion between 2009 and 2011, with an additional €20 billion still to come according to a Brussels research institute. The troubles of Greece et a l. are keeping the euro lower than it would otherwise be, fueling Germany's export machine. And German voters heartily approve of Ms. Merkel's insistence on teaching the overly-indebted nations the virtues of German prudence and hard work.
Whatever the reason—voter opposition to more transfers of their wealth to beach-lolling southerners, a desire to force reforms on reluctant profligates, a desire to force several nations to surrender even more sovereignty, or mere self-interest—Ms. Merkel is earning her sobriquet as Madame Nein. And will continue to do so until she has persuaded her colleagues to amend the euro-zone treaty to permit Brussels (spelled B-e-r-l-i-n) to control the tax, spending and fiscal policy of euro-zone members.
Work on that final piece of the still incomplete architecture of a united Europe will begin at the next euro-zone leaders' meeting on Dec. 9.
At that meeting, the shark that is the euro zone will resume its forward motion. Unless, of course, many of the member nations prefer leaving the euro zone to becoming part of what they have taken to calling the Fourth Reich.
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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