A few days before the German federal election, the American commentator Bob Kuttner called upon German Chancellor Angela Merkel to use the election victory that was clearly in the making to change tack regarding the European Periphery.
Focusing on Greece, Kuttner added to a chorus of commentators who have called for a Marshall Plan, accompanied by a generous degree of debt forgiveness, as a ‘second phase’ of the program of budget austerity and reform imposed on Greece over the past three years. Kuttner even suggested labeling it The Merkel Plan, so as to afford the Chancellor a timeless legacy for genuine ‘tough love,’ as opposed to being permanently remembered, at least in the Mediterranean, for unremitting heartlessness toward citizens of countries bankrupted when the Eurozone’s architecture was found wanting.
The problem with Kuttner’s noble suggestion is that Germany cannot afford such largesse. For it is impossible to imagine that Greece will be treated to a therapeutic combination of debt relief and large scale investments without similar overtures towards at least Portugal and Ireland, the other two original ‘fallen’ Eurozone member-states which, it must be said, had sunk less into the mire of debt than Greece and have since displayed a great deal more ‘moral enthusiasm’ for adopting austerity measures.
How could Merkel ever look the Irish in the eye and explain to them why the Greeks should receive, primarily from Germany, a fresh multi-billion aid package while they remain under a cloud of austerity? How can she tell them that, while the Greek government is excused massive loans that Athens’ Parliament approved while fully cognizant of their size and nature, the Irish people, who were never asked about the hideous promissory notes issued by their government to corrupt private banks, must continue to repay those illicit loans in full?
Similarly with the Portuguese: is Merkel at liberty to present to the Portuguese people such a generous change of heart toward the Greeks after three years of having been impressed by Lisbon’s cross-party Merkelite commitment to progress-through-austerity? Not unless she can offer Portugal similar debt relief and analogous investment injections.
Merkel knows all this. She knows, too, that, were she to institute a Merkel Plan for Greece, Ireland and Portugal, its repercussions for Spain and Italy would be powerful and far-reaching. Italy, a country that has managed to stay very close to the Maastricht deficit limit (of 3% of GDP) and which is a sterling high added value exporter, is already straining under recession-inducing fiscal constraints set by Brussels. Could it continue to consent to them if, at the same time, a Marshall-like Merkel Plan were doing the rounds in Greece, Portugal and Ireland? And what of Spain? Will Madrid, or its electorate, accept the idea that, while Spanish unemployment bolts past the 30% mark, neighbouring Portugal is experiencing a Merkel Plan-induced boom?
Kuttner’s well-meaning proposal will, then, find no advocates in Berlin, even if Merkel warms to the idea of a Merkel Plan and the favourable legacy it will grant her. Put simply, a Merkel Plan would have to be an offer to the bulk of the Eurozone, since most of its member-states could, and would, present Berlin with reasonable claims for assistance. Alas, Germany could not afford this. To fund it, Merkel would have to find at least €300 billion a year for something like a decade. Even if the other surplus countries, plus stuttering France, could be convinced to provide half of that sum, that would mean that Germany would have to channel nearly 4.5% of its GDP to the rest of the Eurozone, as pump priming within the context of a Merkel Plan. Recalling that the Marshall Plan cost the U.S. 2% of GDP annually, it is abundantly clear that a proper Merkel Plan is a bridge too far.
It is not just the cost of a Merkel Plan that makes it prohibitive. The German economy is facing a barrage of problems whose impact will be felt very, very soon. When it is, no German Chancellor, however concerned she might be about her legacy, will dare tell the Bundestag that Germany ought to fund a European Marshall Plan named after her good self.
First among these impending problems is the anticipated diminution of Chinese demand for Germany’s capital goods. As Chinese investment tapers off, courtesy of the simple fact that its current level is unsustainable given the level of effective demand for China’s output, Germany’s capacity to replace falling demand from the Eurozone (mainly from Italy and Spain) with additional demand from China will wane substantially.
There is also a brewing crisis due to the high, and rising, cost of energy; the ‘fuel’ behind Germany’s export-oriented heavy industry. In Texas, where I now live and work, German corporations (e.g. BASF) are building gigantic new production facilities at the expense of investing in Germany. As the energy price differential between Germany and the U.S., but also Germany and the rest of Europe, rises, the German economy will increasingly feel the pinch.
Merkel’s third term will also be plagued by a political backlash that will be difficult enough to cope with even without a Merkel Plan for the Eurozone. The country’s demographics are putting a strain on German hospital, pension and social security systems. Meanwhile, the growing masses of Germans living in poverty and working dead-end, soul destroying ‘micro-jobs’ are unlikely to take kindly to a massive Merkel Plan for countries which the German press and an assortment of German politicians, including many of Merkel’s colleagues, have been painting for three years now as profligate, debt-driven, unworthy Eurozone partners.
Merkel’s Third Term Dilemma
Granted that Germany cannot afford to pay for the Euro Crisis, what can Merkel do during her third term to prevent the disintegration of the Eurozone and the effective dismantling of the European Union that would surely follow? While it is clear that Merkel would love to do nothing much (i.e. to continue with the well-tried policy of “extending and pretending”), she knows that, sooner or later, her chickens will come home to roost, the Eurozone’s integrity shattering under the pressures of the tectonic plates that are shifting under the surface.
One option being contemplated by Merkel and her colleagues is to “amputate and print”: that is, to go back to the idea of a mini monetary union, expel countries like Greece and Portugal and print sufficient quantities of euros to flood the remaining Eurozone money markets with liquidity. This is a dangerous game, as Merkel well knows, and will most likely cause the death of the Franco-German axis as the process of sequentially ‘amputating’ Eurozone member-states cannot end without France being forced out too. And as the Franco-German axis is the one around which the European Union has been revolving, since it started life as a coal and steel cartel, Europe-as-we-know-it will spin out of control.
But there is a second option, proposed by Stuart Holland, J.K. Galbraith and myself. We call it a ‘Modest Proposal for Resolving the Euro Crisis’ and we think that it offers Merkel immediate solutions, feasible within current European law and treaties and, above all else, without any need for the German taxpayer to fund debt relief or needed investment in the Periphery. The idea is to deploy existing institutions that require none of the moves that many Europeans oppose, such as national guarantees, fiscal transfers and troublesome treaty changes, which many electorates could anyway reject. Taken together, these four policies amount to not a Merkel-Marshall Plan but a European New Deal. Like its American forebear it would yield decisive progress within months, through measures that fall entirely within the constitutional framework to which the German government has been committed.
1) A Case-by-Case Bank Programme would bypass the impasse of Banking Union, by sequentially Europeanising troubled banks currently under the jurisdiction of fiscally stressed member-states. One by one, peripheral banks in trouble would fall into the lap of the European Stability Mechanism which would, in association with the European Central Bank, oversee their recapitalisation, resolution or merger, before re-selling them to the private sector. In this way stressed sovereign debt can be de-coupled from bank recapitalisations swiftly but also sequentially, allowing for a proper banking union to be effected only when Europe is genuinely ready for a common resolution mechanism that includes all banks. And when this process is over, and the banks have been cleansed, the European Stability Mechanism will sell its shares into the cleansed banks recouping (most probably with interest) the capital that Europe’s taxpayers will have put into the project of cleaning up their (now unified) banking sector.
2) A Limited Debt Conversion Programme, with the ECB administering a simple Debt Conversion Program for any member-state that chooses to participate. The gist of it would be that the Central Bank pays (as opposed to ‘purchases’) a portion of every maturing government bond corresponding to the member-state’s public debt that it was ‘allowed’ to have under the Eurozone’s foundation Treaty, known as Maastricht (their Maastricht-Compliant Debt or MCD hereafter). To fund these payments (or redemptions), the ECB will issue its own bonds (ECB-bonds) in its own name, guaranteed solely by the ECB but repaid, in full, by the member-states (on whose behalf the ECB will have issued them). This is how: Upon the issue of ECB bonds, the ECB will simultaneously open a debit account per participating member-state into which the latter is legally bound to make deposits (to cover the ECB-bonds’ coupons and principal). And who will stand behind the ECB-bonds in the case of a defaulting member-state?
First, the ECB debit accounts of each member-state shall enjoy what is known as super-seniority status vis-à-vis all its other debts (i.e. they get repaid first by the member-states if the latter cannot repay all their debts to all their creditors). Secondly, the European Stability Mechanism will insure, against a hard default, the repayments by each participating member-state into its ECB debit account. In summary, member-states will enjoy large-scale interest rate reductions (having refinanced their MCD at low rates secured by the ECB) at no cost either to the ECB or to…Germany. Instead of monetising debt, or having German taxpayers pay other nations’ debts, the ECB will have played the role of a go-between member-states and money markets, insured by the ESM. Additionally, the ECB-bond issues will help create a large liquid market for European paper that advances the euro’s reserve currency status.
3) An Investment-led Recovery and Convergence Programme to help shift idle European savings into productive investments and, more generally, to re-cycle global surpluses into productivity enhancing ventures in the parts of Europe that most need them. To do this, at a level that is comparable to FDR’s 1933-1937 New Deal, all Europe needs do is empower the European Investment Bank (EIB) to administer such an investment program utilising its long-held capacity to issue its own EIB bonds (thus mobilising idle savings for investment purposes) to cover 50% of a massive Pan-European investment program while the ECB backs, on behalf of the Eurozone, the remaining 50% of the EIB’s investments. That is the way to inject investment in the ailing Eurozone without asking German taxpayers to foot the bill.
4) An Emergency Social Solidarity Programme to meet basic human needs caused by the crisis and funded by monies, currently accumulating in the guts of Europe’s central bank system, generated from the same asymmetries that helped cause the crisis.
Four policies for addressing Europe’s four intertwined crises, each involving existing institutions and requiring no Treaty changes, no German guarantees of other nations’ debts, no tax-funded stimuli, no Central Bank monetisation, indeed none of the commitments that Europe’s ‘family,’ Germany in particular, is so clearly unready for.
If Merkel is seriously interested in her legacy, she should adopt the aforementioned proposal. This would make her third term synonymous with the overhaul that the Eurozone desperately needs, without mortgaging Germany’s future GDP or committing to an oppressive federal-like ‘marriage’ that neither the French nor the Germans want. All it would require is a rational re-assignment of existing European institutions. All that is missing is the will. “But why?,” I hear you ask.
The sad answer lies in the political realm. Europe’s tragedy is that those with the power to re-design, and in so doing fix, the Euro-system, i.e. Mrs. Merkel during her third term, stand to lose a great deal of bargaining power within the Eurozone if they do so. Put succinctly, if Mrs. Merkel uses her power to fix the Eurozone along lines such as the ones that were mentioned above, she will be forfeiting the exorbitant power of the German Chancellery (within the Council of Europe) to dictate policy to the rest of Europe. Thus, she is unlike to use it in her third term, with the result that the perfectly save-able Eurozone is crumbling all around us. With immense human cost and at the great benefit of thugs like Greece’s Golden Dawn.