If Europe continues its steady march to financial depression and collapse of the Euro, no politician will be more to blame than German Chancellor Angela Merkel. Last week, Merkel repeated the same pattern that has characterized her behavior since the sovereign debt crisis began -- resisting sensible reforms until the costs of delay became overwhelming, and then reversing course 180 degrees only after the damage was far greater than necessary.
First, the back story: It is essential to recall that the European crisis has come in two entirely distinct phases. Europe was actually on the road to a slow recovery in 2009, until hedge funds began attacking Greek government bonds and Greece's neighbors did nothing. This process followed the disclosure by the newly elected Greek socialist government in October 2009 that the Greek state deficit was actually at least three times what had been claimed by the predecessor rightwing government.
The disclosure invited accelerating speculation against Greek sovereign debt, raising Greece's borrowing costs. As Greece fell deeper and deeper into economic collapse, Merkel vetoed any aid from the EU or the European Central Bank (ECB).
Only when Greece having to pay close to 20 percent interest to borrow money, its government was about to default, and the crisis was spreading to the rest of Europe did Merkel relent, in early May 2010. But her price was a stringent austerity program that drove Greece deeper into depression and invited further speculation against Greek government bonds.
Merkel also insisted that the 110 billion euro aid package be dribbled out in small installments, under the close supervision of a "Troika" of the ECB, the European Commission and the IMF, as leverage to make sure austerity was carried out. Often, funds were withheld until Greece was right on the edge of default, creating a psychology of permanent crisis and destroying the entire point of the rescue package.
When this policy backfired and Greece was unable to pay its bills or roll over its bonds, Merkel doubled down on the same failed strategy in the fall of 2010 and early 2011. An additional rescue package required even deeper austerity not just for Greece but binding budget rules for every member nation of the EU.
Merkel repeatedly vetoed direct aid from the European Central Bank or other EU funds to commercial banks that were heavily invested in state bonds under attack by speculators. The stupidity of that policy became clear last month when, at Merkel's insistence, the ECB and Europe's stability fund refused to lend money directly to Spanish banks, but rather agreed to lend funds to the Spanish state, which in turn was to lend the money to the banks. This move only plunged Spain deeper into debt, and intensified the speculative attack against its bonds.
Last week, Europe's other leaders decided they'd had enough. Spain and Italy, much larger economies under speculative attack, were not about to submit to the lethal medicine administered to Greece. The balance of power had changed. Thanks to the election of French President Francois Hollande May 6, the new resolve of Italy's supposedly technocratic prime minister Mario Monti, and the toughness of Spanish prime minister Mariano Rajoy, Merkel found herself thoroughly isolated at the recent European summit.
Monti and Rajoy blocked progress on Merkel's two pet projects, a fiscal pact on budget rules and a permanent rescue fund, as well as Hollande's proposal for a new 120 euro growth initiative, until Merkel relented on two key points. The new European Stability Fund will be permitted to lend directly to banks rather than putting governments deeper into debt to pay for the sins of bankers. And no longer will nations receiving aid have to submit to humiliating and self-defeating austerity programs under merciless supervision of the Troika. The summit also approved the new 120 euro investment funds, to be targeted to the continent's weakest economies.
This is progress, but it comes too late for Greece, Portugal, and Ireland, which have suffered needlessly as austerity programs have driven their economies deeper into the ground. If Europe's bigger nations -- notably Spain and Italy -- are to get aid without coerced austerity programs, common sense and common decency suggest that Greece, Portugal, and Ireland should get no less. An even better policy than adding growth funds would be to suspend austerity programs.
Financial markets were relieved last month when a center-right government was narrowly elected in Athens over a far-left coalition that proposed repudiating the austerity bargain. But no sooner did the new government under Prime Minister Antonis Samaras take office than it, too, demanded relief from the deal's excruciating terms.
Merkel, characteristically, still opposes any respite for the suffering Greeks. It is up to the rest of Europe to isolate her again so that she can reverse course citing changed circumstances. Nor is Merkel willing to seriously rein in the financial speculation against government bonds that turns moderate budgetary problems into dire crisis. This, too, will take the resolve of wiser leaders.
Until German reunification in 1990, there was a delicate balance in the European Union, in which Germany was contained within a broader democratic Europe. Germany was an economic powerhouse, but was appropriately self-restrained politically. Given German history, this was only prudent.
With reunification, Germany not only became even more potent economically, but began throwing its weight around politically. As Merkel keeps proving, this was not a good idea. The rest of Europe's leaders have now restarted the necessary project of containing German influence again, and not a moment too soon.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos.His latest book is A Presidency in Peril.
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"A plethora of previous summits had failed to produce more than talk from leaders and yawns from everyone else. The German Chancellor repeated her warnings leading up to this summit that she’d veto every idea on the table that could bring immediate reprieve to Spain and Italy. Naturally, this accumulated into pessimism that lay like an iron lid on markets all of last week. It’s just as natural, then, when Merkel caved on Friday and gave in on the things she said she’d essentially veto, that the lid came off, and the pot boiled over.
"The froth from the market’s boiling over will quickly dissipate as reality sets in, and people start to wake up this week to the awareness that nothing has changed for Greece, and the solutions resolved for the rest of Europe will take months to actually start working. By then, all will seem too little, too late.
"The plan is far from complete, while the landscape is worsening quickly. Meanwhile, everyone seems to have forgotten that the Greek problem exists as big as ever with Greece determined to renegotiate it’s latest bailout agreement." ( http://thegreatrecession.info/blog/economic-news-articles-the-great-recession-blog-week-06242012/ )
It is already far too little, too late, which has typified everything Merkel has been involved in. She's the great German foot dragger.
--Knave Dave
I could go on,, but you get the point. German-bashing as a European sport. Merkel is a prudent, practical politician who looks after her constituents, who'd never forgive her if she left them holding the bag of Squandered opportunity the Greek state has become.
Merkel tries to do what she was elected and sworn in for: to keep harm away from German people, no more no less. Some posters here seem to believe she is some kind of dictator, yet she has to ask parliament and get a majority for very many decisions which is the usual procedure for a functioning democracy.
Now it's Europe, more specifically Germany.
The crisis that is still on started in 2008, and neither in China nor in Europe (ask the Islandic people). I don't know about Chinese banks, but European countries had to bail out quite a few banks and with quite a few billions to "save the world financial system". Now the financial markets are not "happy" with anything that has ever been done regarding deficits for longer than a day.
Since it is always said "the market" is all about psychology, maybe "the market" needs therapy.
The majority of Germans is happy how Merkel represents us these days. The USA has no political figure that is fit to hold a candle to her.
Not withstanding the fact that that German banks also need to be recapitalized.
http://www.bloomberg.com/news/2011-11-24/german-bank-capital-needs-said-seen-at-more-than-eu12-billion.html
Here are the facts:
Germany need to either return to the Deutschmark which will be priced so high that German exports will be unaffordable,
OR
Stay in the Euro and feed their national treasure to the southern countries in an organized transfer union.
Either way they lose.
They should have figured on that when they concocted the crazy Euro scheme.
Premise 2: Europe is in an economic bind.
Conclusion: Europe is an economic bind BECAUSE OF its liberal polices.
Premise 1: Jones likes chocolate.
Premise 2: Jones went to prison.
Conclusion: Jones went to prison BECAUSE he likes chocolate.
See the fallacy? Europe is in an economic bind for the same reason as the United States: an unregulated banking industry that caused the global economic collapse. Its liberal policies only mean that those who lost a lot of money in the crash have a much stronger safety net to fall back on.
http://programm.daserste.de/pages/programm/detail.aspx?id=FA93812D1C9E01B3B3A4511690D819CA