The eurocrisis is a marathon, not a sprint, Chancellor Angela Merkel told the German parliament yesterday. Thanks to the massive, Fed-organized central bank interventions of the last couple of days, she could be right.While the European financial system is still under great stress, world business leaders are not going to bed at night wondering if the financial system will still be there in the morning as they were last weekend and early this week. The euro is back to being in trouble as opposed to being on its last legs.It is not clear how long this new quasi-calm will last, but Germany has won a big victory in its game of chicken with France. Germany let the markets tremble on the edge of the abyss and did not blink; the ECB did not become the lender of last resort for troubled European states and the financial system held.Merkel was encouraged in her decision not to panic because her voters have kept their heads. A new article in the Financial Times notes that German consumer confidence is growing ahead of the Christmas shopping season:
It is not as if people are not anxious. Germany would not be Germany without a healthy dose of angst. They are worried about the euro, and the safety of their savings. They are worried about government debt and the return of inflation. But they simply do not share the view that the eurozone is in imminent gdanger of collapse. […]
Glühwein merchants rejoice; it is going to be a good year.Merkel and her compatriots have resisted the efforts by financial markets and the PIIGS and allies to stampede her into accepting eurobonds, joint debt guarantees or otherwise extending Germany’s credit umbrella to its beleaguered neighbors.Now comes the hard part. Germany is ready to help the other European countries if the conditions are right. Germany wants the other euro countries to adopt much more rigid fiscal standards than they like. This implies massive social change in countries like Italy, Greece and Spain. They can only have the welfare states they can pay for; Germany can afford a very large one. With balanced budgets, Italy’s would have to shrink.It is not just entitlements and social programs. All democratic systems embrace political favor swapping to some degree. You vote for my earmark and I will vote for yours. But in most of southern Europe, the link between national politics, local politics and business is much closer and more incestuous than in many northern countries. This implies a loosely managed national budget; there has to be enough gravy to go around.Germany wants to shut down the gravy train; this effort faces many obstacles. In the first instance, some very clever people will now try to write regulations and treaty articles that look tight enough to make the Germans happy, but that when administered by bureaucrats and tested by lawyers and courts will turn out to have enough loopholes and workarounds so that nothing much will change. There are some extremely clever civil servants in Italy, France and Spain. Look for some elegant proposals to emerge.Now that the Germans have been roused — the dragon has heard the footsteps of robbers approaching the treasure hoard — they will be more vigilant than usual in trying to protect themselves against Latin chicanery. But the task of the German negotiators will be tricky: there are practical limits to how strict European requirements can be, how stringent the penalties can be, and how rigid the procedures by which violations can be assessed and consequences imposed. In dealing with those natural limits, the skilled and subtle drafters and diplomats from the Latin capitals will have many opportunities to introduce language that will undermine German demands even as they appear to yield to them.More, Italy is likely to have a lot of power in these negotiations. Greece could drop out of the euro and many would see that as simply remedying the mistake made when Greek politicians lied and cheated their way into it. An Iberian departure (Portugal and Spain) would be regretted, but if Italy is forced from the eurozone both the economic and political consequences would be so grave, to the Italians but also to the rest of Europe, that some kind of catastrophe would likely ensue.Italians are good at playing weak hands. They will use the fragility of their economy and the their importance to Europe for all it is worth to make any new European monetary system flexible enough for their current political system to survive.The underlying impasse at the heart of the eurocrisis remains. Everyone wants a European monetary system, but the Germans won’t enter a Latin monetary system, and Latin Europe can’t live in a German one. Something will have to give: either one side or the other must cave, or Europe must give up its common currency.At any moment, the crisis could become urgent once more. But if that doesn’t happen, and negotiations over the future of the eurozone shift into bureaucratic trench warfare, watch out. Chancellor Merkel, to say nothing of the rest of us, will grow very weary by the time the marathon comes to an end. And Germany will have to beware; it faces smart and desperate negotiating partners who will use every resource at their command to fight the kind of Europe that Germany wants to build.