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Germany’s Veto Over Europe

October 12, 2012 Il Sole 24 Ore
The summer truce is about to end. The markets are starting to raise the stakes again and they seem unwilling to give Europe more time to turn words into actions.

Among these actions is the construction of those anti-fire barriers that have been a topic of discussion since June and about which Mario Draghi’s European Central Bank (ECB), unlike EU governments, has already done something. Governments, on the other hand, continue to be absent (and to fight) under the illusion that wasting time in tactics and increasing austerity and reform measures will eventually reduce the problems. Angela Merkel will then try to win the elections in September 2013, without perhaps having to ask for money for distressed EU partners from the Bundestag.

This move has been clear for a couple of weeks now, but it’s not certain whether it will work out. Madrid, rather than Athens, is now sounding the alarm as a the match between Europe’s many hypocrises and contradictions is more significant there. Standard & Poor’s downgraded Spain’s government bonds to near junk, and Moody’s could do the same at the end of the month. The markets reacted with wavering credit spreads. Has the contagion started again, thus worsening the fracture between northern and southern countries within the euro zone?

Some blame Mariano Rajoy for waiting too long before asking for aid from the EU, thus pushing the euro zone to the verge of collapse once more. The Spanish premier commented that he did not intend to do it until conditions for aid are clear. It’s hard to argue that he is wrong. The banking union is still stalled due to the reluctance of northern countries, in particular Germany.The destiny of the operativity of the European Stability Mechanism (ESM), including the direct recapitalization of banks, still depends on rules that are yet to be defined and on a new unified bank surveillance system overseen by the ECB. This system is supposed to go into effect on January 1 but may be be postponed until September, after Germany’s elections, because the issue is not well-received by Germans and by the country’s public opinion. The Netherlands and Finland are also slowing down the process.

Even if the ESM were to be frozen for months, distressed countries could still use the existing fund, the European Financial Stability Facility (EFSF). But this is exactly where the north and the south disagree the most. The aid received through the EFSF, which would also be subject to strict conditions, would be added to the debt of beneficiaries, which are already debt-ridden, while the aid received through the ESM would not. This is why Spain, which has enacted five austerity plans in less than 12 months, is trying as much as it can not to step forward. Merkel, on the other hand, doesn’t dislike Rajoy’s delay, because this way she isn’t forced to go before the Bundestag and ask for approval for new aid. If necessary, she would opt for passing a package that would include Spain, Greece and Cyprus at once, possibly around the end of November.

This attempt to buy time, which blocks the ECB’s “bazooka” and slows down the creation of a new, effective economic governance for the euro zone, is starting to get on the markets’ nerves and to irritate global partners.

Everyone complains about Europe’s indecision and about the confusing stop-and-go’s that, after resounding announcements, block decisions in the twists and turns produced by second thoughts and national opportunism, thus perpetually fueling the euro zone’s instability. Not to mention the fact that everyone agrees on the disastrous consequences derived from blind austerity policies on the economies forced to accept them, consequences that, according to the latest data from the International Monetary Fund, were three times larger than assessed in previous estimates.

“Spain, Greece and Portugal should be given more time to reduce their deficits, because too many cuts at an excessive speed risk producing more damage than positive effects,” IMF Director Christine Lagarde warned from Tokyo. However, Germany’s finance minister, Wolfgang Schäuble, took a very different position: “When there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction,” Schäuble said. “When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher.” That’s it. Chapter close also when it comes to growth, which, according to this argument, should be based on healthy public finances, reforms and more competitiveness, and only symbolically on a Europe-wide action. The plan of merging EADS and BAE was also rejected due to Germany’s opposition because Berlin decided to keep its primacy. The deal would have created the world’s largest civil and military aerospace conglomerate, a giant able to compete with Boeing and, in the years to come, with China. It could have been the industrial arm of Europe’s defense system, but it sank before it was ever created.

Is Berlin really always right? The recession is continuing and doubts are growing everywhere. More and more rightly so.