September 4, 2012
The European Union is likely to take a step to finalize the Continent’s economic and financial recovery strategy. And make no mistake: We all have an interest in this phase of Europe’s protracted struggle to reshape itself.
This Thursday, Mario Draghi, president of the European Central Bank, will announce plans to extend the ECB’s authority in Europe’s market for sovereign debt. When in place—Draghi hopes by next year—the plan will allow the Frankfurt-based bank to purchase sovereign bonds and thus lower the cost of borrowing for troubled nations such as Greece, Spain, Italy, and Portugal. Draghi is also expected to announce the establishment of a European financial supervisor.
This is big stuff for numerous reasons:
• First and most obviously, it will deliver greatly needed relief to Athens, Madrid, Lisbon, Rome and other overstretched Europeans capitals beset in recent months with volatile bond markets and interest rate spikes that have ranged well beyond the affordable cost of borrowing. This will give investors confidence they lost long ago. Indeed, it is interesting to note that borrowing costs have already begun to drift downward in Italy in anticipation of Draghi’s plans.
• Second, it strengthens Europe by moving decisively toward the fiscal union that Europe forgot to forge when it unveiled its monetary union a dozen years ago. The ECB is likely to be home to the new European bank supervisor. That office will represent a dramatic step toward a united Europe and a corresponding weakening of national sovereignty.
• German Chancellor Angela Merkel has moved Germany behind the ECB plan in the course of this summer, and this is decisive. She had long seemed to stand halfway between Brussels and Berlin—a good European but with a noisy, anti–European political constituency waiting for her at home. This now appears to be resolved. Wolfgang Schäuble, the German finance minister, stands with Merkel. Her only major opponent in Berlin’s upper reaches is Jens Weidmann, head of the Bundesbank, the German central bank (about whom, more below).
• Draghi and his allies will end up saving us all, if his strategy is implemented. Do not forget, the EU as a bloc is the world’s largest economy—larger than America’s and larger than China’s, which are customarily ranked No. 1 and No. 2. It has been clear for some time that American companies—notably high-tech firms, auto makers, financials, and industrials—are highly exposed to any kind of crash landing in Europe. Earlier this summer, when Cisco’s CEO, John Chambers, announced that the company’s prospects in Europe were dimming, the stock dropped 11 percent in a single session.
• Finally, there is the philosophic choice Europeans are about to make. It is unabashedly interventionist, and Americans ought to take note, since it is the Europeans who have had their feet closest to the fire. In effect, Europe is about to reject the neoliberalism many Americans hold so sacredly dear. Here is Wolfgang Schäuble on the topic: “The key lesson of the crisis is that self-regulation and light-touch supervision just do not work in the financial sector,” he wrote recently. “Without adequate rules and careful policing, the interests of individuals and those of the system will invariably diverge. Left to its own devices, the market will self-destruct.”
It has taken some compromises to get this far, needless to say. Chief among them are the bond-purchasing limits to be imposed on the ECB
There is also the extent of the ECB’s new supervisory authority. There has been no announced resolution on this point. Draghi appears to favor supervisory responsibilities that extend to all of the 6,000 banks operating in the euro zone, arguing that this would be a convincing measure of power for the markets. The Germans, arguing that Draghi proposes too broad a mandate, say Frankfurt should look after the 20 to 25 largest banks—those that could pose systemic risk—and leave national banking authorities to the rest.
It has been fascinating to watch Merkel and her colleagues in Berlin as they agree and disagree in public. Merkel will win this one in favor of Europe, if she hasn’t already. Being a sucker for a conspiracy theory, this is how I think she has played her cards:
Merkel’s tilt toward Europe has been evident for some time, but so has the degree of resistance her stance has provoked at home. Within her conservative political base, notably the Bavarian Christian Social Union, the catcalls have grown sharper by the week. The focus has been on Greece: Let it fall out of the euro, this segment of Merkel’s constituency has been saying. Greek Prime Minister Antonis Samaras finally complained that the shrill rhetoric was making it hard for Athens to persuade the markets of its strategy.
Last week Merkel lashed out in unusually blunt terms. “We are in a very decisive phase in the fight against the European debt crisis,” she said during a televised interview. “That is why I would ask everyone to weigh their words carefully.”
Then she turned to her fellow guest on the program, Jens Weidmann, the Bundesbank chief and an opponent of the EU plan. There has been much speculation that Weidmann intends to resign his post over the EU question. “I think it is good that Jens Weidmann warns the politicians again and again,” Merkel said. “I support Jens Weidmann and believe it is a good thing that he, as the head of the German Bundesbank, has much influence in the ECB.”
This is political tradecraft of a high order. It is called having your cake and making your adversaries eat it with you.
Merkel has surprised me again and again in the course of a year’s worth of columns on the euro crisis. She is doing the right thing. The EU was formed in part to reintegrate post–Nazi Germany into Europe, to bring it acceptance among its European neighbors. Germany gained much from this. Now it is time for Germany to accept Europe, and that is what we are about to witness.