The Return of the German Problem
Poor Angela Merkel. She's being drubbed for doing too little or too much. What's a lady to do?
All three of the major newspapers—the New York Times, Wall Street Journal, and the Washington Post—feature editorials today about Germany. Only the Journal dissents from conventional wisdom. Regnant opinion is that Germany needs to cinch its lederhosen one notch tighter and engage in the unpleasant but necessary task of coming to the rescue of its feckless southern cousins. Germany, we are told, needs to put its financial muscle behind Eurobonds that will be floated to cover the debts of Greece, Italy and Spain. Otherwise, financial contagion will continue to spread, assailing Germany itself.
The Journal, by contrast, suggests that Merkel has it right. This is the time to hang tough. No bailouts. Assisting these countries by backstopping their debts will stop reform in its tracks. The patient has just begun to get ambulatory. The second he sees a crutch in the form of Eurobonds, he will slack off and return to the easy chair, munching chips all day and musing about what it's like to hold down a job instead of watching soccer matches on the government dole all day. According to the Journal:
Europe's original sin in this crisis was not letting Greece default, remaining in the euro but shrinking its debt load as it reformed its economy. The example would have sent a useful message of discipline to countries and creditors alike. The fear at the time was that a default would spread the contagion of higher bond rates, but those rates have soared despite the bailouts of Greece and Portugal.
Unfortunately, this sounds like a recipe for disaster. There are times when the conventional wisdom is right. This is probably one of them. To have let Greece go under could have triggered a worldwide recession or even a depression. It's true that Europe needs to cut entitlement programs and spending. But that message has already come home. Britain, which is not under as much duress as Greece, is experiencing a general strike today as government workers protest cuts in their pension plans. But the protesters must know in their heart of hearts that the salad days of the postwar social-welfare state have come to an abrupt terminus. What we are witnessing is the last thrashings of a dinosaur, not the beginnings of an emergent new socialist movement. A new Beveridge Plan along the lines of the one that established the postwar English welfare state is not in the offing.
This is why apprehensions about inflation in Europe are misplaced. Those opposed to the creation of Eurobonds are living in the past as well. Like generals fighting the last war, they are fixated with a nonexistent threat. If Italy is unable to finance its debt and the Euro collapses, a new Great Depression could well loom. Polish foreign minister Radek Sikorski, speaking in Berlin on Monday night, stated:
There is nothing inevitable about Europe's decline. But we are standing on the edge of a precipice. This is the scariest moment of my ministerial life but therefore also the most sublime.
The biggest threat to the security and prosperity of Poland would be the collapse of the eurozone.
And I demand of Germany that, for your own sake and for ours, you help it survive and prosper. You know full well that nobody else can do it.
I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.
He is right. Having ravaged Europe a half century ago, Germany now has the chance to rescue it. Will it seize the opportunity? Or will it remain in the shadows, a captive of its dark history?