In Defense of Germany

Gideon Rachman's op-ed piece in today's Financial Times offers support for Germany's approach to the euro crisis.  He cites the newest Economist, in which it is argued that an international consensus on what Angela Merkel should do--shift from austerity, develop a banking union with euro-wide deposit insurance, and a type of debt mutualization (like euro bonds).  President Obama is among the world leaders pushing Germany to do something.

But Rachman argues otherwise. He thinks the demands are politically dangerous as well as unrealistic. Take a Europe-wide bank deposit system like the FDIC in the U.S. Rachman quotes a senior Dutch politician, "'We cannot push through a banking union when the French have just cut thier retirement age to 60 and we have raised ours to 67.'"

I have argued numerous times that the euro was a political decision, designed to force more political integration in the EU. But, as Rachman notes, the necessary integration cannot happen that quickly.  Among things needed would be to have a European government that could override the current national governments. They would need to harmonize the various European social security systems.

Rachman also claims that Merkel has had a political success that is little noted as yet.  She has been able to keep the far-right and far-left parites on the sidelines.  Meanwhile, in the last French election one-third of the voters supported either a far left or a far right party. Currently, the extremist parties are leading in the polls in the Netherlands.  The political center is holding in Germany and this is no small accomplishment.

Is Berlin Worrying Too Much About the Wrong Historical Period?

There is an interesting op-ed in the Financial Times by Niall Ferguson and Nouriel Roubini. They point out that Europe has dithered over recapitalizing their banks, often relying on sovereign debt to do so. Of course, the sovereign debt is part of the problem now.  They also argue that Germany is key but Germany is focusing too much on the hyperinflation after WW I and not enough on 1933.  They offer some solutions that could be worked, and note that the monetary union always implied further fiscal and political integration, a point I have often made.

They conclude with:

Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union. But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.

Tyler Cowen on the Euro Zone

Tyler Cowen has an interesting column in today's business section of the NY Times. He describes the euro zone's instititutional failure in dealing with the crisis.  While the euro creates a "monetary nation", it does not create a true nation. The governments of Greece and Spain are sovereign so all the agreements that brought about the euro are international agreements.  The nation that should be the leader of the group is Germany, but Germany's past makes it difficult for Germany to exert such leadership. (Another leader could be Britain where there is a great deal of human capital in international financial arrangements, but they aren't in the euro zone). Cowen's piece is pretty negative regarding the prospects for a solution that is not very costly.  I am visiting Germany to teach a course for the third consecutive May and the Greek crisis has been in the news each time.  The first time I thought it was interesting but not terribly important, last year I thought it was important and would probably lead to further integration in the EU. This year, I am much more pessimistic about prospects for a successful solution. Something I began to think about being in Germany is that the unification of Germany over two decades ago now offers insight into what is happening in the euro-zone today. After a little research, I'll write more on it in a future post.

Elections in Europe

As expected, Hollande defeated Sarkozy in France.  This will change the status quo relationship between Germany and France, and may shake up the entire EU.  People are not voting for austerity.  I do not want to try and analyze the situation as yet since there may be other shake ups. But I am looking foreward to going to Germany to teach a course on public policy this summer.  Hearing the views of people there and reading European press provides insights hard to get here.  Especially is one gets his news from TV news. (I watched the first thirty minutes of the Today Show this morning, and the coverage of the European elections was minimal.)

I expected Paul Krugman's op-ed column this morning to argue that the elections show that the people do not want austerity and that it is time to promote growth through deficit spending.l  I was not disappointed.

Is the Collapse of the European Union a Realistic Scenario?

Martin Schulz, president of the European Parliament, said that the collapse of the European Union is a realistic scenario.  As president of the parliament, he is certainly an advocate for greater centralization of power in the EU.  For the average European, I believe, the goal is to have the gains from an economic union but they do not want a political union.  As I indicated in a recent post, I think the push for the single currency fifteen years ago was based more on political than economic goals.

Schulz attributed the danger to rising xenophobia and nationalism in the member nations.  But the pressures caused by the sovereign debt problems in Greece and Spain are not the result of xenophoba--there are more the result that Greece has no business in a monetary union with Germany.  Either Greece needs to pull out of the euro or increased political coordination is needed. That is, the EU becomes more like a United States of Europe with more spreading the wealth across borders.

Another point made by Schulz involves the mobility of people across borders.  France and Germany have suggested alterations to the Schengen treaty so a country can reimpose border controls for a longer period of time without EU approval.  They say they fear illegal immigration as countries like Greece have a harder time controlling illegal entry into their country. If someone enters Greece illegally, they can then without trouble travel to Germany. This obviously is similar to the US where if someone gets into Texas they  can then travel to Michigan without facing border guards.  To the extent that illegal aliens is the concern, Germany and France may have a point. On the other hand, perhaps they really want to keep unemployed in Spain from coming to France looking for work.

Pressures in the European Union

There has always been a tension in the European Union between forces that want more integration of the member states and forces that want to maintain sovereignty. Some want integration to be primarily economic while others want more political integration. Politicians in Germany and France have tended to support further integration, including policial integration, but there are signs that may be changing.

According to news reports, Germany and France senta joint letter to the Denmark, which currently holds the rotating presidency of the European Union. Germany and France want a reform of the Schengen Treaty, which is the legal structure that facilitates the free movement of people within the EU. They call for the right of a nation to re-impose border controls unilaterally for 30 days if the national authorities believe other countries are not keeping their borders secure. The concerns are primarily member nations in the eastern and southern parts of Europe. If someone is able to enter Greece illegally, they can then move to Germany without any border controls. Currently, the member governments can impose border controls for five days and that period can be extended only with approval from the EU.

I argued in a previous post that the Euro-zone is not an optimum currency area, and that the push for monetary union was actually a political more than an economic move. Monetary integration cannot work well without more political integration and the move was, at least in part, to force more political integration. But right now, most of Europe is facing economic difficulties with some in crisis. Countries in such situations often look for ways to protect their labor markets. Given very high unemployment rates in Spain and Greece, there has been a large exodus of people from the countries looking for employment elsewhere. France's Sarkozy faces an election Sunday and has been making the EU borders an issue in his campaign.

Will the EU hold together and someday become the United States of Europe, or will it gradually fall apart from nationalistic pressures among the member nations? I still think it will hang together, but I am less sure of the belief now.