The Half Full Glass
If you ask an American banker or economist about the euro these days, their answer is still likely to be gloomy. Many believe that the European model is flawed and needs a major overhaul. This is the view of the former U.S. Secretary of the Treasury Robert Rubin, which he recently expressed at an economic conference in Washington, DC. He dismissed European policymakers, saying they are “still behind the curve.” While admitting that the euro’s existential crisis is probably over, he cautioned his audience not to read too much into the recent optimism demonstrated by financial markets. According to Rubin, recent action by the European Central Bank (ECB) has only bought a limited amount of time – he estimates much less than a year. Market pressure could soon return.
Rubin’s words were echoed by those of Prof. Allan Meltzer, author of a monumental history of the Federal Reserve Bank (Fed). Meltzer is convinced that the Europeans still “have a mess and are making it bigger.” He recently suggested to high ranking German officials to allow the euro zone to be split into two parts, a southern soft currency area, and a northern hard currency euro. He argued that inevitable devaluation in the south would help peripheral euro zone economies regain some level of competitiveness. Eventually, once the most strident economic imbalances are overcome, the two euro currency areas could merge again. Asked about the reaction to his proposals, Meltzer admitted that he did not get very far with his interlocutors in Berlin.
These arguments brought forward by respected thinkers, such as Rubin and Meltzer, are based on purely economic considerations. They underestimate how interwoven the economic and political realities have become in Europe. For many politicians, there are more benefits to kicking the can down the road than to untangling what has become a very tangled problem.
It is for the aforementioned reason that the views of the young rising German politician Thomas Silberhorn, a member of the conservative German Christian Social Union (CSU), still represent those of a minority. Silberhorn recently voted against the latest rescue package for Greece in the German Bundestag. He tried to convince Chancellor Angela Merkel’s governing coalition that Greece should be forced to leave the euro family for the sake of the euro. It was the latest attempt by a vocal minority in the Bundestag to draw a red line. According to Silberhorn, a longer “sabbatical” from the euro zone would allow Greece to remove the straightjacket that is strangling the country’s economy. It would give Greece time to overhaul its economic and political system. Eventually Greece, just like all the other European countries that are currently in the waiting room (expect for the UK and Denmark), could enter the queue and rejoin the club.
Silberhorn, who was on a visit to Washington this past week, could be described as a German hardliner. But the description does not accurately convey Silberhorn’s politics. In fact, he undoubtedly disappointed those in Washington who expected to meet a true euro skeptic. In fact, Silberhorn cautioned U.S. counterparts against mistaking the Irish, Italian, Spanish, and even the Portuguese situation for Greece, and he stressed that Athens represents a one-off situation. He then put all remaining doubts to rest by declaring: “The Euro is our reality, our currency. There is no way to unscramble scrambled eggs.”
Overall, Silberhorn’s failed attempt to stop the Greek rescue plan is a reminder of the fact that when it comes to the euro, differences of opinion among the political leadership in Germany are much smaller than some observers like to believe. Silberhorn’s plan was doomed from the start because the latest Greek rescue effort has to be seen as just one part of a larger plan intended to put the rest of the euro zone on a stronger footing. Gaining more time is essential, as the structural reform process in Italy and Spain has yet to be completed. Furthermore, France is facing a general election and Ireland a referendum on the fiscal compact.
French President Sarkozy is already entirely focused on his re-election campaign. He has even decided to hide ‘Merkozy’ in a closet, at least until the campaign is over. Apparently there will not be any joint appearances of Merkel and Sarkozy on the campaign trail after all.
And so, instead of France, the German Chancellor visited Rome this week. While there, she went out of her way to praise Italian Prime Minister Mario Monti and the head of the ECB, Mario Draghi. Monti and Merkel agreed that Europe has turned a corner. They were quick to point out, of course, that much more still needs to be done. For Merkel, despite the huge challenges Italy still faces, it has become the role model for struggling peripheral euro zone countries with its success at combining austerity with structural economic reforms. German Finance Minister Wolfgang Schaeuble has even suggested to his Greek counterparts that they should postpone the general election and follow the Italian example by putting technocrats in charge. Italy is also the best example of why a potentially dangerous brand of populism is unlikely to take hold of a euro zone member country. For a solid majority of Italians, their country’s ills are in part the result of the populism of Silvio Berlusconi and his separatist Northern League allies. There is a sense of widespread relief that those days are gone, and very little appetite to go down a similar path anytime soon.
With this in mind, German officials are quick to point out that despite the considerable bumps in the road, the euro zone glass is definitely half full, not half empty.