Proof That Merkel Is Europe’s Economic Bully

9/7/2015

She’s the most dominant leader in the euro zone with virtual veto power over decisions

The lesson of this crisis is more Europe, not less Europe,” Angela Merkel said in 2012 as the integrity of the region’s monetary union was threatened by financial instability, touched off by Greek debt, that was spreading through the euro zone’s weaker economies. By “more Europe,” the German chancellor meant a deepening of the continent’s noble mission—peaceful integration to ensure prosperity and democracy—of which the common currency, the euro, is the ultimate symbol.

In the intervening three years, Greeks have come to understand “more Europe” as something different: “more Germany.” That was one of the few clear messages sent in a referendum on July 5 that had everything to do with Greek voters’ views on how Merkel had imposed her vision of Europe on the zone and if their troubled nation would be better served as part of its grand project, or not.

One can debate whether the Greeks, through titanic feats of economic mismanagement and political hubris, have dug their own grave or merely provided others the shovel. But even if Prime Minister Alexis Tsipras commits to another deal, attention has deservedly shifted from the fed-up and diminished debtors to their lenders. Of course, that’s the European Union, a complex organism with numerous regional and national leaders that, in league with the International Monetary Fund, has so far committed $265 billion in bailout funds to Greece. But this is how the EU really works: Germany is the monetary union’s dominant economy, and its chancellor is the region’s dominant leader, with virtual veto power over zonewide decisions. That puts the spotlight squarely on Merkel. And what it’s revealed, despite her calm but firm entreaties, is an economic bully.

Germany and other euro zone countries backed the financing of bailouts, and in return imposed reform on its recipients and other weak member economies. Anything requiring Germany to change its ways, however, went nowhere.

The centerpiece of Merkel’s cure for Europe was fiscal retrenchment. It was an almost maniacal drive for reduced budget deficits and debt levels—the targets for which were already enshrined in euro zone agreements—combined with reforms to labor markets and welfare programs. Merkel believed that such policies would strengthen the euro zone’s financial position and competitiveness. The medicine may be bitter, but in the end, like an ailing patient, Europe would rise from its sickbed with renewed vigor.

The result has been stagnation. After contracting for two years, euro zone gross domestic product crept up less than 0.9 percent in 2014. At 11.1 percent in May, unemployment has barely budged from 11.6 percent the year before. (Compare that with the U.S. jobless rate of 5.3 percent.) Greece, of course, has had it the worst. The terms forced on the Greeks in return for bailouts were politically, socially, and economically unreasonable. The pace and extent of the mandated budget overhaul were extremely severe, especially amid a global downturn. Through all its pain—astronomical unemployment, a shrinking economy—the burden of Greece’s debt has increased, to 177 percent of GDP in 2014 from 103 percent seven years earlier.

Merkel’s insistence on a hard line isn’t masochism, just politics. One poll released in early July showed that 85 percent of Germans surveyed opposed making concessions to Greece. Merkel has faced resistance to a softer line from within her ruling coalition. Amid the recent bailout negotiations, one lawmaker from Merkel’s Christian Democratic Union derided the euro zone’s policy toward Greece as a “financial carousel.” Her hard-nosed finance minister, Wolfgang Schaüble, once said that Greece “cannot be a bottomless pit.” Such attitudes are fostered by a widespread perception among Germans that Greece is unworthy of their aid. “NEIN,” blasted a headline in the tabloid Bild earlier this year. “No more billions for greedy Greeks!” it insisted. Even the referendum results produced little sympathy. Shortly after the vote, Georg Fahrenschon, head of the association of German savings banks, said “the Greek people have spoken out against the foundations and rules of the single currency bloc.”

Such sentiments have hindered efforts to tackle the crisis from the start. For the euro zone to emerge from its woes, change across its economies, not only in its weakest links, is necessary. Fresh growth opportunities would then offset the negative effects of painful restructuring and reform. Countries with stronger fiscal positions such as Germany should boost budget spending to increase demand. Greater joint action at the European level is critical as well. A March study by the Brussels-based think tank Bruegel outlined how the integration of national markets is far from complete. Governments still employ conflicting regulations to protect corporate champions and hamper the formation of Europewide labor and service markets. For example, uncoordinated pension schemes and tax codes inhibit the movement of workers around the euro zone. The poor state of the zone’s economy, the report reads, “requires once again a European strategy to boost growth and employment, in which the single market has a central role.”

While Merkel has thumped her fellow leaders into painful reforms, she has dodged needed changes at home. In 2012 she pressed her neighbors into a new fiscal compact that tightened oversight of national budgets. Yet rather than taking advantage of German financial strength to increase spending, Merkel balanced the national budget in 2014 for the first time in 45 years. Germany runs a tremendous current account surplus—7.5 percent of GDP in 2014, compared with 2 percent for China—which means it should be buying more from the rest of Europe, stimulating exports and growth there. Many economists and policymakers have called on Germany to reduce its surplus by reforming its economic model. “Policies to promote more domestic investment and demand would be good for the German economy and for the global economy,” U.S. Secretary of the Treasury Jacob Lew said in a 2014 visit to Berlin.

Achieving that, however, would entail altering Germany’s own economy by, for instance, getting coddled service industries to increase productivity and wages. A 2014 study of the German economy by the Organisation for Economic Co-operation and Development argued that such steps would also help Germany by boosting potential growth as its labor force ages. The country’s leaders, however, see its surplus as a measure of its economic superiority and react angrily to any criticism. “It would be absurd to discuss whether German competitiveness should be reduced,” Jens Weidmann, president of the German central bank, said in April.

That German view—the euro zone’s problems aren’t of Germany’s making—has dictated Berlin’s approach toward the crisis. Merkel has played the unrelenting taskmaster, treating her beleaguered neighbors not as partners, but as spoiled children who could be set right only by the rod. Last year, French President François Hollande and Italian Prime Minister Matteo Renzi advocated greater flexibility in the austerity program to promote job creation. “If everyone does austerity, we’ll have even slower growth,” Hollande groused in October. Merkel would have none of it. “We have had times in Europe with very high deficits and yet no growth, so we must learn from the past,” she said. When some European leaders proposed “eurobonds,” instruments backed by the zone to ease financing costs on individual states, Merkel rejected the idea.

Even the IMF, in a June report on Greece’s finances, deemed the country’s debt load “unsustainable” and recommended relief. Merkel accepted only minor concessions to bailout demands, insisting that the Greeks impose further tax hikes and public spending cuts. She labeled her offer “generous.”

Is it any wonder, then, that the Greeks said no? They may be only the first. Joblessness and recession have persuaded other voters in Europe to seek a new course. Gaining popularity in Spain, where unemployment is 22.5 percent, is the leftist political movement Podemos, which also seeks a fairer deal from the rest of Europe. “The problem isn’t Greece, the problem is Europe,” Podemos’s chief, Pablo Iglesias, said in late June. In Italy, Beppe Grillo, leader of the anti-establishment Five Star Movement, called for a referendum to decide if Italy should remain in the monetary union.

Europe’s leaders characterized a no verdict in the Greek referendum as a vote against the idea of Europe. In fact, the resounding no was a vote against the existing harsh reality of membership in present-day Europe. Unless Europeans act as partners in their grand quest for solidarity, they will end up with less Europe, not more.

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