September 10, 2012
The best that could be hoped for: That is the obvious way to look at the European Central Bank’s new plans to buy up the bonds of troubled members of the European Union. The markets loved the announcement last Thursday: The Dow bounced nearly 2 percent, Germany’s DAX index nearly 3 percent.
It was perfect timing for President Obama, enabling him to tout his economic plans at the Democratic convention without worrying about a collapse in the debt markets across the water. Europe has done its bit to keep Obama in office for a second term, but it could just as easily—and quickly—create a crisis that hurt his reelection.
But Europe has more to do. Mario Draghi, the ECB’s president, has delivered impressively on his late–July promise to do“whatever it takes” to save the euro. That, however, is half a loaf. Now the central bank and its member countries must save Europe.
What Draghi has done so far is provide limitless standby liquidity to support the austerity plans that debtor nations — notably Spain, Italy, and Greece — are obliged to implement. The big lending banks in Germany and France have drastically reduced their exposure in the eurozone’s crisis nations over the last four years: The German banks by half, according to the Bank for International Settlements, and the French banks by a third.
In effect, Draghi’s plan socializes the debtor nations’ obligations, because they will fall on taxpayers’ shoulders. This creates artificial economies that continue to function even as their banking sectors run dry. It is temporary at best and cannot be sustained, however many billions Draghi ends up spending. The conditions need to be created that allow for the resumption—the prudent resumption—of cross-border lending among private creditors. Is Europe a single market—or is this ambition slipping away?
Now we get to the other half of the loaf. Liquidity in support of austerity is fine; the crisis economies have to clean up their acts. But it is not fine alone. Europe’s economies need to grow again if the Continent is going to right itself in a way that sustains jobs and incomes. Only then will private creditors have reasons to lend again setting Europe’s tattered economies on the mend. Not least, everyone in Europe will emerge as that much more European for having made the effort together.
The jobs-and-growth question has a political dimension that is getting more difficult to deflect. This is emerging as one of the signature questions of our moment. Socialism or capitalism is yesterday’s matter. The issue now is what kind of capitalism the advanced countries adopt, and Europe is facing this more urgently than anywhere else.
Targeted stimulus spending on the Keynesian model is either going to be incorporated into Europe’s recovery plans, or the EU will recommit to the stringency of neoliberal policy as Americans have advocated it. The Europeans have assiduously avoided this question so far, but they cannot much longer—not without adding political risks even in the Continent’s wealthier nations. Consider:
- When Dutch voters go to the polls on Wednesday, they will be voting on the economy, which has been damaged by deep spending cuts and new tax increases. The come-from-behind Socialist leader, Emile Roemer, is committed to restructuring the austerity package put in place by the center-right government now in power, even if it means exceeding EU targets. Roemer may not win; almost certainly, this election will pull the Netherlands toward stimulus spending and tax increases targeted toward the wealthy.
- Greece appears to be near the bursting point. Its economy is expected to shrink by 7 percent this year, even as Prime Minister Antonio Samaras on Friday welcomed officials from the troika of lenders—the EU, the ECB, and the International Monetary Fund—for a review of new spending cuts worth $14.5 billion. Athens is desperate for the $39.8 billion the troika has been withholding until this review. At the same time, the protests we are all used to watching have been spreading throughout Greece.
- Investors and EU officials have credited Ireland with implementing a disciplined austerity program over the last four years of crisis. Dublin has so far pushed through $30.3 billion in spending reductions—equivalent to about 15 percent of gross domestic product, according to the Financial Times. But the government is now starting to look wobbly as a result. And there are $4.4 billion in austerity measures waiting for the Irish in 2013.
- With these circumstances in view, can we be surprised to find that neither Spain nor Italy has shown any interest in Draghi’s new bond-purchasing plan? They both need the aid, and circumstances may force them eventually to take it. But they will decline as long as they can for the simple reason that the conditions the ECB will impose in exchange for help will be socially onerous, risking all manner of political tumult.
So we are approaching a day of reckoning. A dozen years ago, the French prime minister at the time, Lionel Jospin, made the pithy comment, “Yes to market economy, no to market society.” The remark endures, for it expresses what appears to be an emerging consensus among Europeans. And it is precisely what Europe has to decide upon now. Draghi’s new plan will bring the EU partly out of the trees. New thinking will be necessary if Europe is to get entirely clear of the dark forest.
Footnote: Wednesday will be worth watching for two reasons. Apart from the Dutch elections, Germany’s constitutional court will rule on the legality (according to German law) of the European Stability Mechanism, the ESM, which is the EU’s new lending mechanism (and which must be enacted before Draghi’s plans for the ECB kick in). The court’s decision is not foregone, and predictions vary. But Chancellor Angela Merkel has proven remarkably dexterous in isolating her anti–European opponents. It will come as a surprise if the court blocks a key element of Europe’s restructuring plans, even if Europe has not been short of surprises of late.