Understanding developments in the European crisis has become rather like Kremlinology, trying to figure out the meaning of subtle changes in wording and rearrangements of the Politburo on the podium for May Day parades.
One example is Mario Draghi of the European Central Bank (ECB). Sometimes the bank president suggests that he will do what nearly everyone else can see is necessary for the survival of the euro: print lots of them and use some to buy EU government debt, following the example of the Fed and the Bank of England. At other times, it’s as if Jean-Claude Trichet, a former bank governor who boasted of the ECB’s “impeccable” performance in sticking to its 2 percent inflation target, is doing a ventriloquist act, with Draghi in the unflattering role of dummy.
In one respect, last week’s EU agreement was anything but subtle. EU leaders were prepared to go ahead without the United Kingdom, suggesting that they have something serious in mind. But what? The announcement is pretty much a restatement of the 1997 Stability and Growth Pact, and under present circumstances, the deficit targets can only be seen as aspirational.
Applying one of the approaches that used to be standard in Kremlinology—but not necessarily a reliable one, then or now—I will assume that the EU leaders are acting with some sort of coherent goal in mind and work from there. In particular, I presume that everyone who matters now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis. With these assumptions in mind, it’s likely that three factors drive present circumstances.
The first is the desire of the ECB to save face, to avoid admitting its large share of responsibility for the crisis and, if it can, to hold on to its central position and its inflation-targeting system. Under Trichet, the ECB even raised interest rates twice to ward off the alleged threat of inflation. Draghi has reversed this disastrous mistake but still wants to maintain the Trichet legacy, at least in appearance.
Second, the German public (and some others) believe that they are being made to bail out a bunch of feckless Southerners. In reality, the bailout is intended to preserve the European economy—on which the Germans depend as much as anyone else—from the disastrous regulatory failures of the Euro-elite. The primary culprits have been the ECB, European Commission and the financial regulators who implemented the ineffective Basel II accords, a 2004 proposed international-regulatory regime. It’s true that successive Greek governments lived beyond their means, but that’s like blaming Bernie Madoff for the U.S. role in the global financial crisis. For the most part the lenders (notably including French and German banks) were keener to push the rules to the limit than were national governments like those of Spain, which ran budget surpluses in the precrisis years.
Third and most immediately, the necessary steps appeared to require amendments to the treaties governing the EU. But amendments require unanimous consent, with a single country able to veto them.
But from now on, euro-zone economic policy will be made within the euro zone, through an informal negotiating procedure. How this evolves remains to be seen, but there won’t be any effective national veto. And with the UK out of the picture, it’s unlikely there will be much room for exemptions.
The problem of German resistance will take some time to fix, but Merkel can sell the deal as a victory for Germany. Suddenly the return of an old dynamic, in which France and Germany drive the process with the UK ineffectually dragging the chain, looks like an asset.
Finally, it hardly seems possible that the EU leaders would have gone through this whole process unless they expected the ECB to play ball and undertake a large-scale monetary expansion. And the balance of power between the central bank and the national governments has changed pretty sharply. The old rules have been suspended, and there’s no reason to suppose that ECB independence would survive intransigent national leaders. The deal offers Draghi the chance to make a virtue of necessity.
Given recent history, though, it’s equally reasonable that the agreement has just kicked the can down the road. Rather than taking effective action, everyone may keep on doing as little as possible while austerity turns recession into depression. And even if things work out in the short term, there are big problems down the track.
The first is the interpretation of the fiscal component of the accord. It’s actually a slight improvement on the old Stability and Growth Pact because it targets the structural deficit, which means that governments are not expected to reduce expenditures to offset the lower tax revenues and higher social-welfare benefits that are an inevitable result of recessions. Allowing these automatic stabilizers to work is probably as much as can be expected, given the extent to which the ideology of austerity has taken hold.