I have a hunch: that the Eurozone’s profound difference to both the United States and Britain is that, unlike these anglosaxon ‘currency unions’, the Eurozone’s real elite does not want the Crisis to disappear quickly and painlessly. In this post I offer a mental experiment that will help each and every reader rule on the merits of my hunch via introspection (or, perhaps, projected introspection).
Let me explain my hypothesis clearly before proceeding further. Setting aside the feasibility or availability of any magic bullet solution to the Crisis that engulfed us all after 2008, my hypothesis pertains solely to the elites’ (and the people’s) mood; to how Europeans, Brits and Americans would look upon such a magic bullet were it to be presented to their leaders on a silver platter.
Let’s begin with the United States. Suppose that Tim Geithner were to enter the Oval Office, accompanied by Ben Bernanke, with excellent news for President Obama:
“Mr President, we have discovered the magic bullet for ending this terrible crisis; for pushing unemployment down across our great land to an average of 4%, for balancing the federal budget, for re-energising our financial system, for restoring sustainable growth, for returning bond yields to normal levels. Here is a small device. Just press the red button and it will be done.
Alternatively, you may press the adjacent yellow button, in which case the US economy will remain stable at its current state, caught in the same doldrums that beset us over the past two years, with unemployment high for a decade, the deficit in full flight, US Treasury Bills continuing to pay rates close to zero and, meanwhile. equities depressed. The yellow button will, effectively, keep our economy bopping along, stable, miserable and always close to a second dip.”
Would President Obama consider the yellow button or press the red button? Assuming that he believes Geithner and trusts that buttons would do what his Treasury Secretary promises, the answer is so obvious it is not worth dwelling on. He would instantly press the red button and the whole nation (even grumbling Republicans) be grateful for his choice.
Let us now move to the Atlantic’s other side. In Britain the situation would be no different. Mr Osborne would visit 10 Downing Street, with Nick and Ed in tow, and would deliver Mr Cameron the two options, with precisely the same result: A relieved PM would press the red button and effect a miraculous escape from the clasps of his own austerity-fuelled recession.
Finally, picture the scene when a sheepish Mr Schoeble enters the Chancellor’s Berlin office with the following two options:
“Red Button: You press it Chancellor and the Euro Crisis ends immediately, with a general rise in growth throughout Europe, a sudden collapse of debt for each member-state to below the Maastricht level, no pain for Greek citizens (or for Italians, Portuguese, etc.), no guarantees for the Periphery’s debts (states or banks) to be provided by German and Dutch taxpayers, with interest rate spreads below 3% throughout the Eurozone, a diminution in the Eurozone’s internal imbalances, and a wholesale rise in aggregate investment.
Yellow Button: You press it Chancellor and the situation in the Eurozone remains more or less as is for a decade. The Euro Crisis continues to bubble along albeit in a controlled fashion. While the probability of a breakup, which will be a calamity for Germany, will remain non-trivial, the chances are that, if you push the yellow button, the Eurozone will not break up (with a little help from the ECB), German interest rates shall remain extremely low, the euro will be nicely depressed (‘nicely’ from the perspective of German exporters), the Periphery’s spreads will be sky-high (but not explosive), Italy and Spain will enter deeper into a debt-deflationary spiral that sees to a reduction of their GDP by 15% over the next three years, France shall slip into quasi-insolvency, GDP per capita will rise slowly in the surplus countries and fall precipitously in the Periphery. As for the first ‘fallen’ nations (Greece, Ireland and Portugal), they shall become little Latvias on the Mediterranean: devastated lands with a total GDP at around 50% to 60% of pre-Crisis levels, a massive exodus of all their skilled labour, and a destination for cheaper holidays as well as real estate bargain hunting . In aggregate, if you choose the yellow button Chancellor, the Eurozone will remain recessionary, Eurozone unemployment will stay well above UK and US levels, investment will be anaemic, and poverty on the up and up.”
Which button do you think Mrs Merkel would want to push? And, quite a separate question, which of the two buttons would the median German voter want her to push?
Of course, these are both hypothetical and empirical questions and no one can answer them definitively. However, I submit to you, dear reader, that the answer is not as straightforward as in the US and the UK cases. Whereas the yellow buttons would hold no attraction for President Obama and PM Cameron, Mrs Merkel’s yellow button is a far more powerful candidate. For my part, I would like to think that Mrs Merkel would want to opt for the red button. But I seriously fear that she would be terrorised by the reaction of the German electorate were she to do this, and thus let the Greeks and the Italians, the Spaniards and the Portuguese, ‘off the hook’ so easily. For two years now, the German public has become convinced (falsely) that Germany has escaped the worse of the Crisis because of the German people’s virtuous embracement of thriftiness and hard work; in contrast to the spendthrift Southerners who, like the fickle grasshopper, made no provisions for when the tide turns nasty. This mindset goes hand in hand with a moral righteousness which implants in good people’s hearts and minds a penchant for exacting punishment on the grasshoppers – even if punishing them also comes at a cost to themselves.
If I am right (and I fear that I am), the mental experiment proposed here throws useful light on Europe’s spectacular reluctance to deal with the Euro Crisis. For while there is no red button as such, the solution to the Euro Crisis is not as hard to engineer as the 19 failed EU Summits would have one believe.