I discarded an earlier draft of this article as I felt that events were moving too fast in the eurozone for me to write sensibly. Now, upon rereading it three weeks later, I find that not that much has changed. The level of threat to the euro remains high in spite of the "conservative" party's victory in the Greek elections. Prior to the elections, President Obama went on a charm offensive with Chancellor Merkel of Germany -- but it accomplished nothing more than pleasantness. "Madame No" is still firmly in power, able to call the shots for the future of the euro.
The continual gatherings of heads of state, such as the one just concluded in Rome of Germany, France, Greece and Italy, reassure us that the euro will be saved. But the means to do so seem to be as elusive as ever. According to The New York Times, Madam Chancellor was firm in her position:
Ms. Merkel answered that solidarity was possible only with serious controls and collective oversight and that "we have existing treaties and they must be respected."
The bailout funds are "instruments of solidarity," but "you cannot have guarantees without control," Ms. Merkel said tersely.
Mrs. Merkel remains unmoved even after the euro zone finance ministers' meeting in Brussels saw the director of the International Monetary Fund, Christine Legarde, call for the countries of Europe to move rapidly toward a fiscal union. That would mean a radical change in the institutional responsibility for bailout funds, giving the European Union much more authority. Her plea was met with little enthusiasm or discussion. Although the finance ministers agreed to work more closely together, they carefully skirted any mention of national sovereignty.
Ms. Legarde, a former French minister of finance -- hardly a left-wing radical -- sees the EU financial crisis as being at a critical stage. Her assessment, a neutral one from an experienced bureaucrat, is important and prescient amid the restricted role-playing of national leaders who have many political considerations preventing them from acting decisively. Ms. Legarde speaks to the problem; they will smother it with words when the euro-zone heads of state meet in Brussels at the end of this month.
A move toward fiscal union would probably be blocked by more than Germany alone. National sovereignty is at stake. The prime ministers of Britain, Spain and Greece all head conservative parties at home for whom sovereignty is a sacred thing. To seriously consider Ms. Legard's proposal would arouse huge internal debates in many European countries. This will be plain for all to see in Brussels on June 28th and 29th. How much courage will we see displayed by our political leaders?
The important new face on the scene, François Hollande, the newly elected president of France, is the only one advocating the modification of the austerity programs now in place and the introduction of major stimulus programs such as those the New Deal introduced to the United States in the 1930s in response to the Great Depression. But given the position of strength Angela Merkel possesses, not only personally but financially, Hollande has little chance of achieving much success.
Paul Krugman, Robert Reich, Joseph Stiglitz and other American columnists are spot on when they point out that without substantial stimulus programs -- along with budget cuts -- purchasing power will not be available to do its job of pushing the economy forward. Instead, the imposition of strict austerity measures will actually prolong the crisis. Review the present economic scene in Ireland, Portugal, Greece and Spain; they illustrate the limitations -- indeed, the disastrous effects -- of a regimen of sustained austerity.
The crisis is not new. Last spring, the New York Times editorial page gave a bleak forecast:
Spain could be the next European economy brought down by German-led mismanagement of the euro-zone crisis... Austerity, the one-size-fits-all cure prescribed by Ms. Merkel, is not working anywhere. After weeks of misleading calm, and despite huge injections of liquidity by the European Central Bank, countries are slipping back into recession, unemployment is climbing and deficit forecasts are worsening.
Robert Reich predicted this outcome way back in November 2011, when Congress's supercommittee was discussing the budget (emphasis added): "Washington is on the road to making budget cuts that will slow the economy, increase unemployment and impose additional hardship on millions of Americans. The real question is how to stop this austerity train wreck."
But timing is important; the financial crisis is now right on top of us.
My own question is whether the proposals coming from President Hollande and Ms. Legarde, the first economic and the second institutional, will be seriously considered so long as the discussions remain at the level of "What might happen if... ?" rather than recognizing that the crisis is already upon us. My guess is that national positions will remain fixed. It is hard to take seriously guarantees such as "The euro is here to stay, and we all mean it!" -- words spoken recently by Marion Monti, the prime minister of Italy, and widely reported -- when the appetite among governments for creating a real union of European states is nonexistent.
As it stands, the European Union will continue to patch the crisis with financial manipulations to prolong the life of the euro, and will perhaps do so several times as we bump from one member's financial crisis to the next. Tit-bits of national sovereignty will be given up, but not enough to accomplish the major reforms necessary to stave off the eventual collapse of the euro. This collapse, it should go without saying, will have serious consequences for the rest of us in the global economy.
Behind my pessimism lies not only observation of the limitations of our national leaders (even when they recognize that Spain is "too big to fail") but an assessment of the many other financial variables that could be triggered by the private sector. At this juncture we should expect our banks and investment houses to consider broad objectives rather than focus exclusively, as is their wont, on financial profits. But if history is any guide, the private financial institutions will want to continue to plunge ahead, fighting against any encumbrance from government regulations that, they argue, would inhibit their "entrepreneurship." And, sad to say, our own Secretary of the Treasury, Timothy Geithner, pays lip service to this spurious notion.
Given the conservative political climate in Washington, effective restraints for the "free market" are not high on the policy agenda for either the Democrats or the Republicans. Whether the crisis ravages European countries first before arriving on our doorstep -- as the Great Depression did -- be sure that it will be only a matter of days or a few weeks before the effects are felt among us. And it won't mean simply our banks needing another bailout; it will mean a disaster that will worsen existing unemployment and cause pain for all of us. It will be like 2008 all over again. Perhaps worse.
Krugman said it all back in April:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should -- by spending more to offset falling private demand -- but with fiscal austerity...
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the "austerians" insisted that the reverse would happen.
I admire Chancellor Merkel as a politician and as a political leader who holds her ground. But the future of the European Union and the euro are very much in her hands. She may soon be faced with the choice of being a hero in Brussels and, at the same time, being spat upon in the boardrooms of Germany's banks. She may have to choose between being saint or martyr or both. When the recession arrives, from whatever source, she may go down in history as just being stubborn.