Saturday, June 9, 2012

The Economist Scolds Merkel's Obstructionism

Half-Baked Rescue Plans, Overwhelming Focus on Austerity
In mid-June of 2012, the Economist ran a piece scolding Angela Merkel for Germany’s obstructionism in the face of organized efforts to address the rapidly forming European sovereign debt crisis.  In the view of The Economist, Germany’s actions have done a great deal to turn a crisis in Greece – around 3% of the Eurozone’s economy- into a crisis of the 17-member Eurozone at large. “The overwhelming focus on austerity; the succession of half-baked rescue plans; the refusal to lay out a clear path for the fiscal and banking integration that is needed for the single currency to survive". The Economist points the finger directly at Merkel’s government over these policy failures “Since Germany has largely determined this response, most of the blame belongs in Berlin.”

The Consensus in the Rest of Europe – and World
According to the economist, the feeling in the rest of Europe, as well as in the US and China, a number of policy measures could be put in place to respond to the crisis. They proposed measures would help save southern economies as well as northern banks.

“Outside Germany, a consensus has developed on what Mrs. Merkel must do to preserve the single currency. It includes shifting from austerity to a far greater focus on economic growth; complementing the single currency with a banking union (with euro-wide deposit insurance, bank oversight and joint means for the recapitalisation or resolution of failing banks); and embracing a limited form of debt mutualisation to create a joint safe asset and allow peripheral economies the room gradually to reduce their debt burdens. This is the refrain from Washington, Beijing, London and indeed most of the capitals of the euro zone. Why hasn’t the continent’s canniest politician sprung into action?”

For their part, southern Europe’s banks have thus far proved to be considerably more resilient in the face of European volatility than their northern counterparts. So far, Spain has only seen one bank collapse… four years into the crisis at that. Compare this result with UK, Ireland, Holland or Belgium.

Why the Arrogance Then?
“She believes, first, that her demands for austerity and her refusal to bail out her peers are the only ways to bring reform in Europe; and, second, that if disaster really strikes, Germany could act quickly to save the day. The first gamble can certainly claim some successes, notably the removal of Silvio Berlusconi in Italy and the passage, across southern Europe, of reforms that would recently have seemed unthinkable.”

In other words, the Economist accuses that the action of Merkel’s government are designed to override the sovereignty of both the European Union’s 26 other member nations (and their democratically-elected governments) and the European Union itself. Berlusconi notwithstanding, the removal of foreign heads of state and the forcing of policy changes in foreign countries is a direct affront to the idea that the affairs of a country should be decided by that country’s voters: Democratic Sovereignty.

What Should be Done?
First, the proposed measures should be enacted. These are; the formation of a banking union, and the partial mutualization of debt. Second, the democratic sovereignty and national interest of the other 26 member nations should be defended as aggressively as is necessary. Germany’s austerity-demand-based obstructionism can, for example, be overcome by a series of bilateral agreements which simply exclude German participation.  
Max Berre is a financial regulatory economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

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