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By Elizabeth Pond
As European leaders clashed at their umpteenth "last chance" summit to save the euro at the end of June, everyone from French President Francois Hollande to billionaire George Soros heaped blame on Angela Merkel. Even the Czech government and the Bulgarian Central Bank jumped on the bandwagon to isolate Europe's new "Iron Lady." But as a German taxpayer, I would like to make a plea on her behalf.
Granted, I'm not German. However, I live in Berlin. I therefore contribute each year to the liquidity both of the Finanzamt and my IRS office in Texas. That gives me squatter's rights to argue that Merkel is being given a bum rap.
The first reason for this judgment is economic. At this point, almost four years after the Great Recession hit our globalized world, nobody seems to know what could finally pull us out of the recession or what it would cost. To be sure, every economist has his own prescription, but there's no consensus on a coherent revision of the old faith in unleashed market forces that got us into this meltdown. Policy is fiendishly difficult to choreograph when undercapitalized banks, skittish bond markets, conflated sovereign and private debt, financial contagion, moral hazard, labor immobility, capital flight, and financial deadlock in Washington and Europe all carom off each other in unpredictable ways.
Thus, while foreign critics hector Merkel to rescue each new euro zone country that comes up insolvent—Cyprus is the latest, despite all its bank deposits from Russian oligarchs—none of the kibitzers can assure her that even a magnanimous Berlin could afford the final bill. Like any sensible hausfrau, "Mutti" aka "Mama" Merkel refuses to write a blank check on the world's fourth-largest economy. Step-by-step prudence in overhauling a failed system can be a virtue, even in a crisis.
The second reason is political. The longer the recession goes on and unemployment rates soar, the more populist pressure builds in Europe—whether from right or left—to revert to beggar-thy-neighbor and xenophobic measures. So far, Berlin has escaped such extremism, in part through Merkel's leadership from behind. There is no equivalent in Germany to France's anti-Europe, anti-immigrant National Front Party that won 18 percent of initial presidential votes this year, nor to the Netherlands' virulent anti-Islamic Geert Wilders, who now gives the Hague government its one-vote majority in parliament.
By some miracle, Merkel—who studied non-political physics and experienced only top-down rule in her native Communist East Germany—has mastered democratic electoral politics in the 22 years since German reunification and the end of the cold war. Critics may accuse her of diluting European solidarity and regressing to nationalism in her insistence that European Monetary Union members must not violate the EMU treaty ban on bailouts (which would necessarily require the rich Germans to underwrite close to a third of any incurred costs). Yet she has brought her voters—and parliament and balky regional premiers and Germany's skeptical constitutional court—along with her in each new bailout-by-some-other-name that she has reluctantly approved in order to stave off bankruptcy in Greece, Ireland, Portugal, Spain, and soon enough, Italy.
Merkel's political success was hardly preordained. After she agreed in May of 2010 to Greece's first euro zone bailout of 110 billion euros ($140 billion) and a "temporary" €440 billion ($550 billion) euro zone fund to rescue debt-ridden member states, her popularity sagged. German taxpayers objected to subsidizing Greece's world-class tax evaders; approval of her coalition dropped to 34 percent, the lowest German government rating in a quarter century. German commentators speculated in unison about early elections and the end of the Merkel era, even as financial markets began forcing high interest rates on emergency borrowing by Ireland and Portugal as well as Greece.
Then, in early 2011 Germany's revered central bank expressed its displeasure with Merkel's slide away from the strict fiscal rectitude that underlay Germany's half-century-long economic miracle. Her preferred nominee as the next head of the European Central Bank, Bundesbank President Axel Weber, announced he would not be a candidate, and she finally nominated Italian Mario Draghi instead. In the same year ex-Bundesbank President Juergen Stark resigned from his post as chief economist of the European Central Bank in a vain protest over Draghi's plans for unorthodox ECB bond purchases to stanch the financial contagion that was by then already threatening the core of the euro zone's fourth- and third-largest economies in Spain and Italy.
At that point, just as Merkel was on the verge of agreeing at yet another euro zone summit to set up a permanent €700 billion ($875 billion) European Stabilization Mechanism to stop the contagion, the German Constitutional Court hemmed the chancellor in. It allowed for temporary financial rescues of ailing EMU members—as long as the Bundestag approved each and every step along the way—but outlawed any permanent bailouts or common-liability euro bonds. This effectively scotched the European fiscal union that Merkel was promoting.
In this hostile atmosphere, Merkel fought a defensive rather than an offensive battle for public opinion. Instead of campaigning for euro zone financial solidarity as a worthy end in itself, she defended further financial rescues of fragile euro zone states as a necessary last resort to avoid catastrophe both for the euro and for the European Union as a whole. All too plausibly, she argued that the costs of returning to national currencies—including German export losses from high valuation of any revived Deutschemark or some strong new northern European euro—would far exceed the costs of strengthening solidarity with less competitive euro zone states now. And she secured her flanks by persuading opposition Social Democrats and Greens as well as recalcitrants in her own ranks to support her moves.
In addition, Merkel appealed to her voters by compelling private holders of bonds issued by weak EMU states to join in north European taxpayer rescues by writing off almost half of their repayments. She further —only in Germany would this be a vote winner—instituted national austerity to get Berlin's own budget down to a 3 percent deficit within three years. She turned the tide; by mid-2011 opinion polls again showed her to be Germany's most trusted politician.
This summer's latest rescue measures by no means resolve the fundamental long-term dispute between the German and Finnish champions of austerity and the Mediterranean proponents of growth stimulus (which would have to be funded largely by Berlin). When details have been agreed on by the end of this year, up to €100 billion ($125 billion) from the euro zone's existing funds are to be made available to recapitalize failing Spanish banks directly, thus avoiding any increase in Madrid's sovereign debt. Ireland too, as a nation that is seriously reforming its finances, may be granted a similar deal. Any beneficiary banks will agree to the conditionality of good management and to pan-European supervision by a new watchdog to be set up under the European Commission.
Euro zone funds will also be empowered to buy bonds on "auction" as soon as they are issued by debtor countries that agree to structural reform. This will set a ceiling on open-market bond yields and avert punitive interest rates. Successor governments will be bound by existing agreements.
Still on the potential agenda for the next euro zone summit on July 9 and beyond are more coordinated fiscal policies, Merkel's dream of a future fiscal union with a single European finance minister, a pan-European bank union with common regulations and deposit guarantees, and perhaps one far-off day, even a political union.
Does the latest bargain escape the agonies of too little too late of the last two-and-a-half years of crisis?
Both the Bundestag and global financial markets have answered in the affirmative. After several hours of sometimes heated debate, the Bundestag approved Merkel's negotiation by a two-thirds cross-partisan majority that excluded only the Left carry-overs from East Germany. And the value of the euro and of worldwide shares has risen.
German pundits in both highbrow and boulevard media, however, are characterizing the deal as Merkel's sell-out. In addition, half a dozen new challenges have already been filed asking Germany's Constitutional Court to rule that too much of Berlin's fiscal sovereignty has been surrendered in the latest deal without proper democratic oversight. Angela Merkel will need all of her political skills to manage the next stage of the euro crisis.
Only a few more weeks will render the final market verdict of the latest "last chance." For whatever it's worth, though, I am one German taxpayer who believes Angela Merkel deserves at least two loud cheers.
Elizabeth Pond is a Berlin-based journalist and author of The Rebirth of Europe.
[Photo courtesy of World Economic Forum]