Europe’s Unclear Horizons
Those who spend time on the northern German island of Sylt can spot the local slogan “KLAAR KIMING” on flags around the island, which in English means clear horizons. Perhaps Treasury Secretary Geithner’s stop in Sylt this week to see German Finance Minister Schäuble was aimed at looking for clearer horizons for the euro. However, just as the weather changes very quickly around Sylt, so does the political weather around the euro. And that weather can generate storm clouds for both Geithner and his boss back in Washington, especially in the next three pivotal months.
Secretary Geithner’s mission in Sylt this week, as well as in Frankfurt to meet with ECB President Draghi, was to deliver a message that the U.S. was anxious about the euro and by the continuing dismal economic picture in the U.S.
With the November 6 elections looming closer, Geithner was clearly making a pitch to Schäuble to keep the euro crisis from further unraveling, a fear that both he and President Obama share. Yet the results of the Sylt session yielded only a boilerplate press release, without much more than repetition of previous platitudes and promises to work hard at continuing to continue − the same results which usually emerge from the marathon of EU meetings. Geithner’s pleas to Schäuble were not going to move much from a man who is facing a barrage of challenges in the coming months, including domestic political squabbling within his own coalition government in Berlin, a constitutional court decision in mid-September that could declare some of the EU policies to deal with the euro crisis unconstitutional, and an uncertain path for a Greece that could be leaving the euro within the year.
Geithner was also looking for signals about the next steps to be taken in the short run to ensure that the bottom does not fall out of the euro zone. The mantra from the Obama administration has been that Europe continues to be an enormous concern to the U.S.’ prospects for growth. The euro zone crisis and the corresponding economic slowdown in Europe is impacting the chances for an American recovery, and financial fears in Europe are causing unease in U.S. capital markets. From Geithner’s perspective, the challenge for Europe – and Germany in particular – is in the pace and sequence of steps taken to avoid further uncertainties in the markets. Whether that pace will overlap with the speed of events in the coming months in the U.S. remains an open question.
The symbolism of the meeting − on an island continuously pounded by North Sea waves − is not lost in Germany’s increasingly difficult struggle with its position in the euro crisis. Berlin is taking incoming fire from several directions and looking ever more isolated in Europe. Anger about Germany’s tough position on dealing with the ailing countries in southern Europe has intensified as the economic situation in Greece, Spain, Italy, and elsewhere in Europe continues to be volatile. Chancellor Merkel remains adamant about demanding hard austerity measures before any further financial aid is offered. She is not giving in to what some German officials refer to as the sweet poison of mutualized debt, arguing that this increases the dangers of debt-ridden countries postponing the necessary steps they need to take to get their economic houses in order.
This position is not going down well elsewhere in Europe, including in Paris, where President Hollande has been pushing for a greater emphasis on growth strategies, not much to the taste of Chancellor Merkel. Yet when Merkel demands more measures to assure accountability and oversight in the EU to secure fiscal discipline, the French reaction is to see its sovereignty being infringed on. Hollande has not welcomed the kind of structural economic reforms being pushed around, such as deregulating labor markets, raising the pension age or reducing state spending, let alone giving the EU more oversight over French fiscal policies.
The mantra coming from Merkel that “we need more Europe” is still missing a consensus on what “more Europe” means.
How long Angela Merkel can hold out against the mounting political waves pounding on her position is dependent on how much she sustains the support she needs in Germany. This week saw polls in Germany clearly supporting Merkel’s stubborn stance on the euro, even while half the country remains pessimistic about the currency’s outlook in the face of Merkel’s repeated message to Germans that the euro is in Germany’s national interest. Before she left for vacation, the chancellor said that she will do whatever possible to protect the euro. Yet the looming exit of Greece from the euro zone can only underscore that the game plan is not clear. With Merkel facing elections next year and Italy having to choose new leadership as well, the next twelve months will cast a shadow on political choices in Berlin and Rome. Added to that uncertainty is the question of who will be sitting in the White House next January.
For now, unlike the political leadership in Europe, the financial markets are not on vacation. They are also searching for clear horizons. “Klaar Kiming” flags fly in Sylt even when it is fogged in and raining hard in the hope that the weather will improve. But there is never a guarantee. Which is why you must also follow the second half of the slogan on the flag that reads – “Rüm Hart,” or you have got to have a wide heart – and hope for better weather.