European leaders are blamed for exacerbating the euro crisis, but for the wrong reasons
Nov 18th 2010
IN MAY, when they rescued Greece from the bond markets at the 11th hour, the members of the euro zone vowed never to get into such a mess again. To keep the speculators at bay, they armed themselves with the biggest gun they could muster: a trillion-dollar loan fund. Many hoped the weapon would prove such a deterrent that, like the “bazooka” of Hank Paulson, America’s treasury secretary under George Bush, it would never have to be used. Yet, just as with Mr Paulson’s guarantee, the euro zone’s weapon barely deterred the barbarians.
Now Ireland is under assault and the euro zone has loaded the first bullet into the chamber. On November 16th euro-zone finance ministers said there would be a “short and focused consultation”, involving the European Commission, the European Central Bank and the IMF, to assess the best way of helping Ireland to salvage its collapsed banks (see article). There has been a curious role reversal between the Greek crisis in May and the Irish one now. In the spring everything was made worse by the hesitation of the main donor, Germany, over helping spendthrift Greeks. This time it is the would-be recipient, Ireland, that is prevaricating dangerously. Yet, like it or not, the rescue party is being saddled up. Will it succeed?
It would certainly help if the riders showed better order and learnt to shoot straight. The German chancellor, Angela Merkel, is at the forefront, but she is also the subject of much mutinous talk since leading her colleagues into the badlands at last month’s EU summit. She persuaded them to reopen last year’s Lisbon treaty to create a bail-out system that would allow the restructuring of a country’s debts. No longer, she declared, would good European taxpayers have to bear the risk of protecting their financial system alone; she would exact a price from speculators too. Jean-Claude Trichet, the ECB president, warned the leaders that they risked stirring up restive markets, but was ignored.
Within days, the euro countries cantered into a new ambush. Yields on the bonds of weak countries broke new euro-zone records. A fortnight later, at the Seoul G20 summit, Mrs Merkel was still in combative mood. “Let me put it simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world.” But a day later the EU sent out a peace party. The finance ministers of the five biggest countries explained that they had been misunderstood. The debts of euro-zone members were protected by their bail-out fund until 2013; any notion of imposing “haircuts” on bondholders would apply only to new debt issued thereafter.
For economists such as Jean Pisani-Ferry, director of Bruegel, a think-tank in Brussels, Mrs Merkel’s action was a good idea that went wrong. Investors should indeed bear some of the pain, but she would have done better to venture into this territory next year, once markets had calmed down, and with a proper map. Brian Cowen, Ireland’s prime minister, grumbled about the turmoil being an “unforeseen consequence” of the German move. His Greek colleague, George Papandreou, was less charitable. Germany, he said, risked creating “a self-fulfilling prophecy”. It was placing greater burdens on countries already in trouble. “This could break backs. This could force economies towards bankruptcy.” Wolfgang Schäuble, the German finance minister, made clear he thought the Greeks were being ungrateful for the help they received earlier this year.
Other politicians have exacerbated matters, too. Portuguese ministers spoke openly about needing a rescue or even having to leave the euro. Hours before the finance ministers’ meeting, Herman Van Rompuy, president of the European Council, carelessly talked of Europe being “in a survival crisis”. It was left to Olli Rehn, the laconic Finnish economic commissioner, to call for “cool heads”. Plainly, the rescue of Ireland is not made any easier by all the political bickering. But in a union of 27 countries, decisions inevitably take longer and messages get more confused than markets would like. European politicians who delayed the Greek rescue and now seem to be making a dog’s dinner of the Irish one deserve blame for responding slowly and fitfully to the signals from financial markets—a charge that has much resonance when it comes to the Germans. Yet it would be wrongheaded to leap from this to blaming Germany for the euro’s crisis.
It was the Greeks, not the Germans, who lied about their deficit numbers (this week, the true Greek deficit for 2009 was pushed up again by the European statisticians, to 15.4% of GDP). It was Dublin (and Madrid), not Berlin, that presided cheerfully over a hugely inflated house-price bubble. It was Irish politicians, not German ones, who happily took plenty of campaign-finance contributions from their property-developer chums. Mrs Merkel has much to answer for when it comes to running a large current-account surplus and imparting a deflationary bias to the euro zone. But she is not to blame for the feckless failure of weaker euro-zone countries to push through reforms that might have made up for their loss of competitiveness.
The benefit of self-harm
If there is any silver lining at all to emerge from the turmoil of recent weeks, it is that the value of the euro has fallen, or at least that it has stopped rising. A euro crisis is certainly an expensive way to achieve this goal, but at least exporters will be grateful. According to the latest figures, the euro zone as a whole posted a larger-than-expected trade surplus in September. Many feared that the euro might get caught in the crossfire of the currency war between America and China. They were wrong. Ranged against the shotgun of America’s quantitative easing, and the shield of China’s capital controls, Europe does at least have leaders who are well drilled in shooting themselves in the foot.
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