Wednesday, January 5, 2011

Dealing with the Euromess: Let’s not lose sight of the big picture now

Paul Krugman's essay 'Dealing with the Euromess' in the IHT of 14 January 2011 is the best piece yet on the Eurocrisis and what it means. It is deep analysis, wonderful storytelling, gives concrete scenarios and ends with a clear call for forther European integration, for Europe and the World's sake. It seems that it needs an American Nobel Winner to make those points. Let's hope it has the necessary impact.
Below is my modest contribution which comes to the same conclusion as Krugman.

Europe is in crisis, probably in the biggest crisis since 1945. What we do not need is a German solution which destroys the basis for European integration. A divided Europe with a strong Germany has not lead to much good in the past.

European unification brought more prosperity to all of Europe, to the Germans, but also Portuguese, the Irish, the Slovaks. Europe’s history after 1945 is a wonderful story and a creative achievement of which we Europeans can be proud of. But in its 6th decade Europe’s internal and external attractiveness is weakend.

Internally, Europe is emotionally drained after a decade of institutional reform and massive enlargement. Then came the financial and Euro crises. And now we realize that despite years of process optimization (which lead to the Lisbon treaty) we did not built the necessary structures to underpin the Euro. Now we need to carry out difficult reforms of the EU financial governance in the midst of an economic crisis. This is both an enormous challenge but may just turn out to be the kick Europe needs to move on.

Externally, thus far Europe was described as an economic giant and a political dwarf. The Euro Crisis has also changed this. The economic giant is tumbling. And a tumbling giant is losing its hard and soft power in a rapidly changing world. I could virtually feel this during recent meetings in Beijing and Ankara where the current Europe was compared to Latin America in the 1990th and further negotiations were postpone until ‘you Europeans have sorted yourself out.

We had European crises before and mastered them. Then, Germany was an essential part of the solution, a broker for which German interests where part of a wider European interest. Now Germany has to invest further in this role. Just as Angela Merkel did in 2007 when she brokered a deal to get the EU out of the institutional deadlock.

But this time Germany’s role in Europe is disputed. Of course, Merkel’s insistence on budgetary discipline is principally right. But her hesitation to find a quick solution to the Greek debt crisis last year lead to massive speculation, hugely increased the costs of the bail-out and awakened nationalistic voices in Germany which seemed long forgotten. Also the Irish crisis Germany viewed simply as a financial matter. The way in which Germany handled the Euro crisis has damaged her ability to act as an honest broker in Europe. Who wants a German Europe? Not me, and I believe, neither does Ms. Merkel.

What should be done? There are two ways out of this crisis: the market fundamentalist solution, i.e. the break-up of the Euro resulting in a gradual roll back of European integration. Or the brave political step forward towards a real economic and financial Union, starting with the quick introduction of Euro Bonds as an immediate signs to the financial markets that this is going to happen.

Now we need confident political leaders who get the big picture and provide their technical (finance) expert with a clear political frame for a solution which define German interest within a broader European interest. That’s what Helmut Schmidt and Helmut Kohl did successfully in their times. Leading Europe out of the current crisis could be Merkel's lasting legacy.