The Biggest Threat is Not a Flop of the Euro

Published on 2012/06/11

There is one thing the political class agree on: The euro is a project that must not founder. Angela Merkel, we all know, got so carried away as to make the absurd remark: “If the euro fails, so will Europe.”

But the spectre of the failing euro has long ceased to be the biggest threat, as the idea to save it “at any cost” is much more hazardous. Because the very question as to what price will be too high to pay to save the single currency must not be raised.

The political arena would like to signal to “the finance markets,” which are perceived as foes: “We are willing to save the euro at any cost.” Far from being just a symbolic signal for public consumption, it represents unfortunately the innermost conviction of the political class.

Meanwhile, vast sums have been spent on the rescue mission of the euro – and to all appearances the money will be lost, because it has become rather obvious that there is no way to bail out Greece. But if trouble in a small and economically insignificant country such as Greece is enough to plunge Europe into chaos, and if a “bailout” is hardly possible even here, how is a “bailout” of economically much more important countries such as Spain and Italy supposed to work? While I have tabled this same question time and again in this very publication, it is conspicuously amiss from the political discourse.

The drama of the situation – and this is another thing I have kept stressing in any number of commentaries – is obscured by the fact that the yield rates for Italian and Spanish bonds no longer reflect the real market conditions due to the support measures undertaken by the ECB. Yet the bailout action hardly works anymore, and the rates of return for ten-year Spanish bonds are down to six percent – despite enormous support purchases. The price paid in this case is very, very high, for it is nothing less than the loss of the ECB’s autonomy. The end that was to be achieved by the measure, namely to lower the yield rates of government bonds in Italy and Spain, was accomplished for a limited time only.

Meanwhile is it becoming increasingly obvious that Spain is facing financial collapse without European “aid” because the country is no longer able to save its distressed banks. And while everyone is looking at Spain, people tend to forget that Italy confronts a problem as least as formidable.

The most disastrous aspect of the current German policy is that any thought of alternatives appears to be taboo. Hans-Olaf Henkel, the former President of the BDI Federal Association of the German Industry, proposed the project of a “northern euro.” Political leaders have either ignored or debunked such deliberations, yet did so without presenting any alternative to their own policy of “let’s just keep borrowing.” Not incidentally, each new bailout measure is labelled as “without alternative.” This comes as no surprise: If you pledge not to think outside the box and not to ponder other approaches, any decision you make is bound to be “without alternative.”

Merkel’s policy of “money in return for reforms” is not wrong in and of itself, if only the errant countries were willing to undertake true structural reforms, e.g. of their labour markets. But neither Italy nor Spain is willing to do so.

Small-scale “reforms” simply fall short of the mark. If truth be told, the European countries should face up to the fact that the model of the European welfare state has flopped just like the experiment in socialism before it. What they need are not pusillanimous “reformlets” but a radical deregulation and consistent implementation of market-economy structures. Not one of the European countries is prepared to take such a step.

In the age of globalisation, however, there is no entitlement to a “European” standard of living just because a given country happens to be geographically located in Europe. For a country without a business model, without a functioning state apparatus and completely fossilised structures, such as Greece, there is just no way around a radical systemic shift. That things cannot go on as they have been is obvious to everyone, even to people in Greece.

Yet the conclusions that the Greeks have drawn are disastrous: They actually want more government and more socialism, instead of less government and more freedom of the market. Chances are that many other Europeans feel the same way. And they are ultimately encouraged to do so by the sitting political leaders who have the nerve to announce that salvation lies in stronger government regulation above all.

In face of the dramatic situation, the issues addressed by the German policy makers these days seem perfectly absurd. Instead of discussing the question of Germany’s and Europe’s economic and financial future in a serious and controversial manner, they engage in debate about child care bonuses and stock exchange taxes, and generate artificial problems for the country, such as the half-baked and in the present form completely superfluous “energy policy shift”, in addition to the existing and truly grave European issues.

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