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Bad News Could Force Some Real Decisions

Irwin M. Stelzer

Sometimes the really bad news is good.

Jürgen Stark’s decision to resign from the board of the European Central Bank, not too long after Axel Weber quit as Bundesbank president, just might put paid to the dithering that has characterized euro-zone policy making for too long. And the equally disturbing news that the Greek economy is in virtual collapse, shrinking by 7.3% in the last quarter, puts more than a little pressure on euro-zone politicians to abandon the notion that press releases are synonymous with action, and austerity with prudence.

Messrs. Stark and Weber have, in effect, put it to German Chancellor Angela Merkel, who has attempted to do enough, but only just enough, to keep the troubled euro-zone countries afloat, while playing for time that might ensure she can bring her party and coalition partners along with her to a more permanent fix of the euro-zone problem. She knows full well that Germany is heading towards a role most Germans despise: lender of last resort to countries that have failed to get their fiscal houses in order.

She knows, too, that her countrymen had been promised that the euro zone would never, ever, become a transfer union, with hard-working Germans dipping into their pockets to pay for the relaxed lifestyles of the sun-drenched co-inhabitants of the euro-zone. Fear not the surrender of your beloved deutschemark; the euro will be equally solid and, in addition, will bring perpetual peace to a Europe that will see Germany as a benign force and valued partner.

Policy making in Germany is always more about history than about economics. Ms. Merkel’s predecessor, Helmut Kohl, believed that setting the bedraggled East German mark equal to the strong West German mark was essential to make reunification work, objections of small-minded economists notwithstanding.

So, too, with Ms. Merkel. She believes, as she told her Parliament last week, that “The euro is much, much more than a currency. The euro is the guarantee of a united Europe. If the euro fails, then Europe fails.” Remove that guarantee, and Germany will be left alone in Europe, the dominant economic power by far, once again feared by its neighbors.

It is this remembrance of wars past that still dominates thinking in elite political circles in Europe, and not only in Germany. Finland, for example, is the victim or beneficiary—take your pick—of creeping euro skepticism. But push a bit on the idea that Finland, its finances in good order, might do better outside the euro zone, and you confront history: The Finns fear Boris more than they do Brussels. They want to shelter in a united Europe, and live under the NATO umbrella because they remember the Soviet Union, war, and years of what came to be called Finlandization—forced subservience to Soviet interests. If living with the euro and silly directives from Brussels is the price of a good night’s sleep when Vladimir Putin returns to rouse the Russian bear, it is a small price to pay.

The Stark and Weber resignations have given Ms. Merkel a small problem now, but a gift for her long-run policy. Yes, there are Germans, and influential ones at that, who do not agree with the ECB policy of buying up the sovereign bonds of Spain, Italy and Portugal. And, yes, they have sound economic reasons for their objections. But for Ms. Merkel the solution is not withdrawal, but faster forward movement on the road to tighter integration of Germany into a united Europe.

Germany will share its income and wealth with the profligate nations. But in return it will demand a say in how they set pensions, how they determine public-sector pay and the structure of their private sectors. “In the long term,” says Ms. Merkel, “Germany cannot be successful if Europe isn’t doing well.” Note she says “successful,” rather than merely “prosperous.” And if that requires amending the treaty that stitched the European Union together, so be it.

The other good news—the virtual collapse of the Greek economy—is that it might make the eurocracy question its infatuation with austerity. Spending is cut, taxes are raised, but the deficits keep rising relative to a shrinking gross domestic product.

Now there is some possibility that the bad news from Greece, combined with the policy brawl set in motion by the Stark and Weber resignations, will trigger a genuine policy debate. Imposed austerity might placate voters in Germany and elsewhere whose capital is being conscripted for the benefit of the profligate. But it does not seem to be producing the desired results. And it does shift the burden of excessive lending by investors from those investors—these are not little old ladies in tennis shoes, but sophisticated lenders—to taxpayers, whereas default would impose losses on those who knowingly took the risk of lending to Greece, Italy and others.

Austerity is no substitute for structural reforms that might, only might, replace stagnation with job-producing growth and an increased flow of tax revenues. Politicians in Rome, to cite one example, would rather face the impotent wrath of fellow practitioners of their trade in Brussels, than the vote-sapping ire of the trade unions who want to defend the growth-stifling monopoly privileges of their workers. Austerity might be unpopular, but fundamental reform is even more upsetting to many voters who have specific interests to defend.

Messrs. Stark and Weber say ECB bailouts might produce inflation, another word rich with historic meaning, and the markets are on the verge of a nervous breakdown. Now just might be Ms. Merkel’s moment.

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