Sarkozy and Merkel

Governments and central banks are doing all they can to prevent a devastating collapse of the Euro, which could potentially create panic in the US and a global economic meltdown right at a time when conditions have started to improve.    Can they succeed?

They say that every crisis holds an opportunity.   The key to avoiding collapse and coming up with a long term solution for the Eurozone is to expand and deepen European unity.   Rather than tearing the EU apart, this crisis could make it a more cohesive unit.   What doesn’t kill the EU, only makes it stronger.

So as markets worry about the potential of a real crisis should the Euro fail, Sarkozy and Merkel hold the key to the Euro’s future.  While we still think in terms of sovereign states, globalization has connected the financial system to such a degree that a Euro collapse could mean a dollar collapse.    Contagion from big banks in Europe can sweep through the US and even China and the third world.

Euroskeptics — those who opppose the EU and the effort to unify Europe — seem to be on the rise.   In polls national governments trying to save the EU find support dwindling as distinctly nationalist rhetoric takes over.   A lot of people look at this and say “see, the people are rejecting the EU, it’s going to fail.”   But that overlooks one important fact: EU supporters may be a minority in many countries, but they have money and power.   To borrow a phrase from OWS, the “1%” are adamantly behind the EU and the need to save the Euro.   Businesses and corporations would face higher costs and chaotic conditions should the Euro fail.

Even in democracies money talks.   The capitalist class, the elite, ‘big business’ — whatever you want to call them — are determined to save the Euro.   That’s why I’m convinced it will be saved.

On Friday Chancellor Merkel will address the German Bundestag a day after French President Sarkozy gave a speech calling for a “refounding of Europe” and promising that he and Merkel would meet Monday to develop a plan to expand qualified majority voting (making it easier to pass binding policies on all) and enhance coordination of fiscal policies.   It all looks like a well choreographed political dance.

Sarkozy takes the lead, something the Germans have almost always wanted the French to do.  The French like that role, and it softens perceptions that the Germans are dictating what to do to the rest of Europe.   Even 65 years after WWII Europeans are sensitive to that!    At the same time European Central Bank head Mario Draghi promised that if the political leaders could reach agreement, the ECB would take stronger action.   The ECB has been criticized for not doing enough, this signaled a potential change.

In the US, the Federal Reserve announced it was approving temporary dollar liquidity swap arrangements, essentially meaning that the US would loan money to European banks to help it through a potential crisis.   This does two things.  First, it buys time meaning that some kind of set back in European talks doesn’t mean disaster.   Second, it signals to the EU that the US is on board with making saving the Euro a priority.   This is not an act of charity — US banks and the US financial system would be devastated by a Euro collapse.

Dark blue states are in the 'Eurozone,' the other light blue states are in the EU, with year of membership noted. This map does not include Estonia in the Eurozone, though it joined this year

A lot of people have criticized the Eurozone for having monetary union before fiscal union.   How, people ask, can you have one monetary policy and 17 separate fiscal policies?   But while that question seems to imply that the monetary union was a bad idea, it could also be seen as a reason for the monetary union — the monetary union was meant to make coordinated fiscal policies a necessity.   Monetary union would lead to fiscal policies becoming more similar.

Indeed, the rules underlying the EMU were meant to enforce fiscal restraint — debt was to be below 60% of GDP and deficits no more than 3% of GDP.   These rules, however, got brushed aside both as Germany’s cost of unification created higher debt than would have been allowed (they’ve since passed a balanced budget amendment) and a recession in the 90s led to a softening of the rules.   When the boom of the bubble years came, Europeans like Americans got fooled into thinking the good times would last.   Efforts to promote fiscal discipline faded.    The imbalances grew rather than contracted and the result is a Eurozone crisis.

Thus it falls to Nicholas Sarkozy and Angela Merkel to continue the Franco-German engine of the EU.    This duo is not the first.   Konrad Adenauer and Charles De Gualle signed the Franco-German friendship treaty and worked hard in the early days to make the then “European Economic Community” of six nations a success, building a customs union by 1967.

In the seventies as the EU suffered oil shocks and sharply divergent monetary policies, Valery Giscard d’Estaing and Helmut Schmidt not only promoted very important institutional reform, but they set in place the European Monetary System that began the move to monetary union.  In fact, in the late eighties in retirement they publicly called for a push towards EMU, starting the discussions that would lead to Maastricht.

In the eighties and nineties a new duo, French Socialist Francois Mitterrand and German conservative Helmut Kohl worked tirelessly to make European union a reality, and were the most important actors behind the push to not only pass the Maastricht agreement but to persevere politically even when people in their own states doubted its wisdom.  Kohl was an especially committed and foresightful Europeanist, believing European stability required European union.

Each step of EU development has seen a strong Franco-German force behind the moves.    Now its time for Merkel and Sarkozy to join the Franco-German duets of the past to not only put forth a plan to rescue the Eurozone, but also to take this crisis and use it as an opportunity to move the Eu forward.   Are they up to the task?  I wouldn’t bet against them.

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  1. #1 by Otter on December 2, 2011 - 07:53

    It’s OK Erb, we know you don’t bet at all. Sarkozy moves to greater European unity by… threatening to cut-off European unity?

    France seeks change to Schengen border agreement
    http://www.bbc.co.uk/news/world-europe-13171403

    • #2 by Scott Erb on December 2, 2011 - 20:33

      Italy recently allowed 20,000 Tunisians into the country, potentially giving them access to any Schengen state in the EU. French public opinion is very opposed to the possibility of massive migration into France from north Africans, and given how Sarkozy needs to do a political dance to try to bring about tighter fiscal union to save the Euro, he needs to give the right wing something. His proposal, though, seems to be to simply make it easier under “exceptional circumstances” to suspend the agreement (already there is a suspension provision for national security concerns). This would probably be a very limited power and shouldn’t threaten European unity or ease of travel.

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