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Merkel, Alone

European news has been roughly the same for three years.  An agreement is reached between a group of bland looking national leaders, and then one of them disappears from the scene.  There’s been an election or a series of protests that led to a resignation, nevermind the reason why.  When the cast changes, the old agreement is tossed aside and negotiations begin again.

Why can’t Europe get its act together?  Why is it so dependent on personalities?

That gets us to the chief personality of them all, German Chancellor Angela Merkel.  She has been the one who, with her conservative Christian Democratic Party, has insisted on “austerity”, the tightening of budgets and paying of bills even as the economy crashes.  And now Merkel stands completely alone.  Does this mark the end of austerity for Europe?

To understand the change of leadership we have to start at the beginning.  The Euro brought prosperity through most of the 2000s because sales of goods and services no longer required currency exchange from Francs to Deutschmarks to Lira.  Everyone who did business across Europe had to keep a little bit in reserve in case the various exchange rates shifted suddenly.  With one currency, all that extra reserve was no longer needed.  It saved everyone a bundle and freed up a capital everywhere.

The key to success was a rock solid, reliable Euro.  The European Central Bank (ECB) was set up to make that a reality – and absolutely nothing else.  Their mission is narrowly defined at making sure that the value of this relatively new thing is unquestioned and constant not just in the Eurozone but around the world.

So far, so good.  The capital freed up was invested throughout Europe in all kinds of great new projects, the economy boomed, and people were happy.  Technocratically oriented conservative or center-right governments, like Merkel’s, were elected across the continent.  They kept the budgets in balance as ordained by the agreements that set up the Euro.  Since no one could simply print Drachmas or Pesetas anymore, everything had to stay carefully in check.

Think of Eurozone nations as something more like US states in that sense, with limited tools at their disposal to spend their way out of a jam.

This all started to change in 2008, as it did everywhere.  Nations found tax revenues were down and deficits started to pop up.  They were told to tighten their belts and keep at it.  Greece, however, was forced to admit something that was an open secret across Europe –their supposedly balanced budget had been fudged for years.  When times were good everyone looked the other way because, after all, what harm could tiny little Greece do?  But many bond traders who were not in on the secret were burned badly by the threat of default and Europe suddenly looked sick.

Since 2009 tax revenue has withered across Europe as economic growth slowed to nothing.  The old budget requirements started to look like a straightjacket, and were quickly labeled “austerity” by the opposition.  Calls for a bit of spending to spur growth in contrast to the old regime has defined politics across Europe since.

This debate may seem strange to observers in the US because we have never had it.  Our conservatives have never favored austerity, especially not through the spendy Bush years – as Vice President Cheney famously said, “Reagan proved that deficits don’t matter.”  The closest we have come to austerity was the negotiation over the debt ceiling last August.  That process spooked everyone so badly that the net result was a tacit agreement to never talk about it again.  Even the “Super Committee” that was supposed to fashion a budget agreement quietly failed with no repercussions at all.

But not in Europe.  As this debate has moved through the streets, the media, and into the palaces of power leaders have fallen and agreements are renegotiated again and again.  The once dynamic duo of conservative austerity, Sarkozy and Merkel, is reduced to Merkel standing alone – and a state election showed that the people of Germany are not as strongly behind her.

To create a “dimension of growth”, which French President Hollande campaigned on, there may well be new “Eurobonds” backed by the member states and a release of new funds to shore up governments across the continent as they spend their way towards more growth.

It’s worked so well in the US so far, yes?  No, not so much?  Well, that’s exactly what Chancellor Merkel is worried about.  But the situation has slowly slipped out of her hands.  Austerity may be dead and the Euro may flood the world the way the US Dollar has.  What exactly that means depends entirely on how successful the new agreements are at propping everything up – and actually creating growth.

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22 thoughts on “Merkel, Alone

  1. She sounds like an interesting person. I don’t agree with her stand so far but to be so resolute is impressive. I don’t know if “technocratic” is exactly fair but she is paying attention to details. That sounds refreshing to me.

    • She is a very interesting person, and very hard to get to know well. The more I think about it there were quite a few colorful conservatives in Europe, especially Berlusconi of Italy and Sarkozy of France. I would describe Merkel as more “technocratic” largely because of who she has appointed to key positions – and her own quiet, slightly mysterious demeanor. But looking over photos to find a good one showed me that she is actually very expressive. I think I like her, even if I disagree with her hard line on austerity.

    • Resolute or stubborn? It’s resolute to defy political pressure, but it’s stubborn to defy facts.

  2. They seem like they are screwing up but at least they are having the debate. There is no president over there or any one single leader to steer them all one direction. Merkel is filling that void pretty well. You should write more about her.

    • Yes, they are having he debate! That is what I think counts. However, they are also dragging their feet and really pulling down the rest of the developed world. This beast called “Europe” is pretty disorganized. You make excellent points.

  3. forget merkel – the people of greece and spain and france have spoken – austerity is socialism for the 1% alone. europe will be by and for the people. we have a lot to learn from them. they know how to organize and make real change.

    • They do have an open democratic process that makes ours look pretty closed, yes. I hope it delivers them something good in the end because I can only see civil unrest growing at this point. As long as it makes something good happen, I’m OK with that.

  4. Since the Germans are, by and large, the ones owed the money, it doesn’t seem surprising that they would be the ones wanting others to suck up “austerity” in order to pay it back…. I suppose any German leader would tend that way.
    What seems different to me about Europe is that there is still a wider political spectrum, so there is real debate about whether the people should unilaterally suck up the consequences of irresponsible actions by financial institutions. In the US we just presume that the fat-cats should and will come out on top. (I’m not saying that total fiscal and monetary indiscipline is the answer to a sound economy, but it appears that the indiscipline originates with the financiers more than with the people. Why should loans made without due diligence be repaid at the cost of “austerity”…..?)

    • The differences between the US and Europe are pretty stark, and they fascinate me. I don’t entirely know what it means over the long haul, but our complacency is chilling IMHO. I think it’s obvious that some level of forgiveness is going to have to be part of the package all around the world, but we do it all as a backroom deal – and rarely cut the little people in on it. I think I like the European system much better – despite some obvious faults. Then again, I think we’re more likely to get through this at least in the short term.

  5. President Obama ought to meet and speak with Chancellor Merkel. Europe is imperiling his re-election bid. I don’t know why we have to suffer through the chaos going in Europe. Portugal, Ireland, Spain, Italy, and Greece are dear to the hearts of Americans and the US and China should help them out since their banks need re-capitalizing. If the banks lack capital, just give it to them, because political stability in Europe becomes endangers. I don’t want to see the Euro or the European Union come apart. Rule No. 1 is that Europe is not allowed to destroy itself.

    • I hadn’t really thought about what we might have to do in this. I suppose we do have to be a part of it at some point. I know the Fed has funneled some money their direction, but then again the Fed are the only ones actually doing something about this problem.
      It’s hard to imagine Europe coming apart because it feels like armageddon. There must be some role for us in this. Bretton-Woods? Another Marshall Plan? The last time we had this debt as a share of GDP (and more!) was at the end of WWII, and we grew our way out of that rather than pay it off. Thinking about this globally is a real headache no matter what. You’re right, there has to be some role for us – and the developing world. Getting that together is almost as hard to image as the post-apocalyptic landscape that remains if the Euro fails.

  6. Apart from direct aid, the other solution I like is a 2 tier Euro. Currently the Euro is too low for Germany and it is too high for Greece.

    In terms of aid, Greece needs a very large stimulus or else they will suffer for too long.

  7. We are papering over our problems by bailing out the banks and leaving them in charge. Have been doing that at least since the Reagan-era S&L meltdown. But the longer-term price we are paying is piling up. I tend to see it in terms of transfers of wealth, transfers of political power, construction of a police state, hollowing out of the “real” economy …. that are fundamentally altering this country in ways we don’t want to face up to and likely can’t live with. I don’t have any answers.

    • I don’t think this can continue, either. We are awash with “stimulus” dollars that are sitting on deposit with the Fed and not getting out into the economy. That’s what the last piece was really all about – there are good ideas out there for incredible transformations but they are not getting the resources they need. Meanwhile, the people who making money by playing with money are taking on more and more risk in forms that no one really understands.
      We need a “New Deal”. The old hand has played itself out, and it’s time to reshuffle the cards. I don’t think there are too many people out there who wouldn’t be happy playing the hand they get, but they don’t have a chip and a chair to play the game. That’s just fundamentally un-American.

  8. Your energy series was excellent; we need an Energy New Deal here in the US. I believe corporate savings will go to new investments once demand here picks up. Barataria is trying to spread these new energy ideas, so hopefully some New York financiers are reading this.

    In Europe Germany needs to restructure. They don’t need a growth strategy through exports. They should have stopped that ten years ago. Since they have the wherewithal, Germany needs to start manufacturing businesses in other nations–some in Southern Europe; others in Latin America, Asia, and Africa. Africa wood is the primary source of fuel; the developed world needs to invest there. In many parts of the developing world the electricity supply is not reliable. Business are reluctant to locate where the infrastructure is below par. An energy new deal could involve sending them US engineers to help them with this.

    • Thanks, I hope people with some money are reading, too! 🙂 I’m trying to highlight investments that would work right now, even if the economy doesn’t pick up soon – transformational techs. I understand some of the thirst for internet app based companies, but if they would only look beyond the immediate sector there are many opportunities, even in a down economy.
      I agree on Germany, although their manufacturing base is still important. It should, however, be used as a springboard for a center of technology. I think their natural place to develop is where they are moving now and have been for hundreds of years – to the East. But Southern Europe would be interesting as well. There are also opportunities where they fit in very well with Latin America as the high-tech partner meeting resources and cheaper labor – plus, Latin America is already fairly well developed in places. I think you already see this in Brazil, so it’s not a stretch.
      But yes, Germany needs a sandbox to play in. They have a lot to give the world if it’s done well.
      Damnitall, we do need some kind of Bretton-Woods agreement on currencies, pricing, and maybe a solid Metternich “sphere of influence” agreement as well. What does the G20 actually talk about? Who would lead some kind of global re-alignment?

  9. Talking about German economic imperialism is going to make a lot of people nervous. Makes me nervous. But in any case the economic problems of Europe are not centered in Germany.

    • Yes, it’s best not to get too into what Germany can do for Europe – but they can do a lot more than they are. I found this article on what Greece can do for itself really interesting http://www.bbc.co.uk/news/business-18101399 Rather right wingish in some ways, but I’m filing this one away in my li’l brain awaiting more information to either confirm or refute it.

  10. Pingback: Greek Drama, New Act? | Barataria – The work of Erik Hare

  11. Pingback: May You Live in Interesting Times | Barataria - The work of Erik Hare

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