Point maker Merkel's stance on a Greek bailout is sound
It's been a standard theme of commentary of late to say that Angela Merkel, Germany's Chancellor, could be the leader of Europe — but doesn't want the job. When Merkel took on much of the E.U., above all French President Nicolas Sarkozy, with her lonely, stubborn and ultimately victorious campaign against a Greek bailout, she became "Madame Non" in France, and Public Enemy No. 1 in Greece. At home, Joschka Fischer, the Foreign Minister of the government she ousted in 2005, gave her an F for an "extraordinary foreign policy disaster." Germany, he surmised, was no longer the "motor" of European integration, but was rather pursuing its "narrow national interests" instead. This is precisely the suspicion that floats through many European minds. Is Germany, reunified and powerful, back to its bad old ways?
Nothing could be further from the truth. Assertive Angie is no Kaiser Bill. Nor is fiscal probity anti-European — quite the contrary. Article 125 of the Lisbon Treaty, Europe's quasi-constitution, forbids bailouts for the reckless. Moreover, in the last few months the euro has lost more than 10% against the dollar, and the fiscal chickens have come home to roost. The central problem — as critics of the euro predicted before the currency's launch — is not Germany's tightfistedness; it is a common monetary policy without a common polity that sets fiscal policy.
Take as a metaphor a train stringing together 16 engines; these are the members of the Eurozone. Each has to steam along at the same speed. If any or several of the 16 engineers throw too much coal into the boiler by way of excessive government spending, the train will derail. That's grade-school physics.
This is where we are, almost. Nor is Greece the only culprit. It is all the PIIGS: Portugal, Ireland, Italy, Greece, Spain. All of them have been shoveling too much coal. To keep their folks warm, they spread euros around like there is no tomorrow, especially to their powerful public-employees unions. By the same token, they have been loath to raise taxes, let alone take on entrenched interests. The fallout is right out of the introductory economics textbook.
The fiscal deficits of the PIIGS are among the highest in Euroland. Their unit-labor costs have risen faster than anywhere else. So their exports can't compete; hence they run some of the largest current-account deficits. What do you do when you shovel coal and run out of fuel? You borrow — as the PIIGS have done. The markets have cast their verdict on that. Now, Greece has to borrow at twice the interest rate that German bonds fetch.
This is where Merkel stomped on the brake. Greece will not get a single cent from the E.U., except in the direst of straits, and then only as loans. As Voltaire famously preached, harsh retribution serves not only to punish the culprit, but also "encourages the others" to remain virtuous. Surely, if Greece had gotten the handout, other PIIGS might have merrily continued in their extravagant ways.
So who is the bad European? Not Merkel. Yes, the Union should not forsake its stumbling members. But Mediterranean states already get plenty of funds from the European kitty as steady entitlements. And solidarity, a favorite shibboleth of all good Europeans, goes both ways. Europe should spread the wealth, but help works best when the profligate show remorse for their sins. This is why Merkel's no-bailout rule could have an entirely salutary effect, by imposing fiscal rectitude on the wayward.
Still, let's not praise Merkel the martinet too much. She has not acted out of pure selflessness. As the richest nation in Euroland, Germany would have had to pay the largest share of the bailout. And if the euro careens out of control, Germany would end up as the biggest loser. With the euro derailed, the new deutsche mark would be everybody's darling, driving its value up — not a cheery prospect for the world's second biggest exporter.
By the same token, let's not put all the blame on the PIIGS. The writing on the wall is Greek, but the message holds for much of Europe. There is too much deficit-spending and too little microeconomic reform throughout the continent, which is why the U.S. and Asia, both more flexible, will emerge more quickly from the Great Recession. In Brussels, Merkel grabbed leadership by insisting, "No, we won't!" Now, if she would only pull it off at home by prodding her resistant electorate toward long-overdue economic reform, with the cry of, "Yes, we should!" Alas, to nix is easier than to nudge.
Joffe is editor of Die Zeit and a fellow of the Institute for International Studies and of the Hoover Institution at Stanford University