Is It (Finally) Crunch Time in Europe?
Published on: June 1, 2012
show comments
  • Anthony

    WRM, could one infer that a presumption of original monetary union (euro/eurozone) was eventual European Union; that is, were European policy makers anticipating euro leading to eventual political unity?

  • thibaud

    Europe needs its own Federalists who can argue for the logical solution to this mess, which is a tightly integrated, German-led Europe comprising the core Rhineland nations plus Italy.

    It’s the same issue as faced the ex-colonies in 1787: Europe will either become much more integrated or it will collapse.

  • Kenny

    1. The mess will not be soon settled and instead will drag on for years.

    2. Germany may like the idea of ‘more Europe’ but the relevant question is if they can afford it.

    And whether they know it or not, each concession the Germans give to the PIGGS + France, it will set the Germans that much further down the slipper slope of which there will be a point of no return.

  • @ WRM – “Germany is slowly chewing over this problem. Superficially everyone continues to assert that the goal is to have both—a European Germany and a German monetary policy for Europe. But if the circle can’t be squared, the political establishment would choose Europe, and public opinion would choose sound money.

    In America, that division would probably mean that the political establishment would lose out and public opinion would triumph.”

    What makes you say that? On the two really big issues of our time — trade and immigration — the political establishment has not only won out so far, they’ve kept both issues off the agenda. Instead we fight over gay marriage, Trayvon Martin, abortion rights, and other similar hot button issues that are both irrelevant to the welfare of most Americans and over which neither Congress nor the President has authority.

  • cubanbob

    The Germans have the upper hand. They will not destroy a large amount of their wealth for the sake of Latin Europe.
    No sane national government would do so. The fact that there are large movements of funds out of Latin Europe in to Northern Europe signifies that the Latin Europeans understand that their countries will devaluate and the German’s won’t.

    American’s shouldn’t be smug either. Quite a large amount of money has also left the US for the same reason.

  • Otiose8

    I’m skeptical that if only Germany would agree to compromise its standards a bit that a pathway to a ‘solution’ can be found. What the Europeans are desperate for is a solution that will let them eat their cake and keep it too. They want to keep their current high living standards/benefits without generating the economic value to cover the costs. Up till recently this discrepancy was covered by heavy borrowing. The borrowing levels were increased – and the party kept going – by manipulating the banking regulations/rules/Basel to encourage/incentivize banks to use their deposits and their own B/S to buy sovereign debt allowing debt levels to get to their currently unsustainable levels. Dragging Germany down getting them to co-sign on more debt will not fix the solvency (vs liquidity) problem. Increasing the debt levels further in expectation of reforms is delusional. Only when the money is finally cut off will the necessary reforms are made. The question now is whether Germany will be dragged down with those who caused the problem.

    And, remember all that debt when it’s written off / extinguished represents someone’s savings/deposits/investments somewhere who will be taking real losses.

  • Andrew Allison

    “Angela Merkel and her rivals and colleagues need to demonstrate to the voters that they have tried every trick in the book and exhausted every alternative before they make the final and fateful choice.”
    The key issue here is that price that Germany will demand for financing the short-term solution. My guess is enforced euro-zone wide fiscal policy, with countries unwilling to cede fiscal sovereignty being shown the door. Anything else would condem Germany to becoming a long-terme Sugar Daddy, which is unacceptable to both the voters and the politicians.

  • WigWag

    “The Germans and a handful of allies want what could be called a “non-political” monetary system in which the central bank keeps the value of money steady (no inflation) as a way of keeping the system honest.” (Walter Russell Mead)

    Now that the Dutch Government has collapsed and has abandoned them, do the Germans have even “a handful” of allies?

    The Euro nations are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

    With only Austria, Finland and Luxembourg on their side, can the Germans even muster the support of a “handful?”

  • Corlyss

    Elsewhere WRM said, “It’s still too early to predict how this will all play out”

    Still? After 3 years of this on-going psychodrama? The original premise of a US of Europe was politically and culturally unsound from day one. Playing with the money was the easiest thing to do because it was only a thing. Politics, language, and culture are much much harder to intergrate absent one nation conquering the rest in war and forcing their language and culture on the losers. Tried that. Didn’t work. On top of that, the relevant nations suffer a democracy deficit within their own borders. When they set up the bloated and ineffectual European Parliament but put reg writing in the hands of a permanent bureacracy in Brussels, they only magnified the democracy deficit. This project can end in only one way: total failure. They’ll be lucky if the divorce is amicable and doesn’t end in another round of fratricidal war.

  • Corlyss

    @ Anthony

    Of course it was. They just couldn’t talk about the endgame as political unity. Ordinary European would vote for that. The planners thought they would sneak a fait accompli onto polities accustomed to doing as they were told. But to date the governments haven’t been doing any of the heavy lifting. They’ve let the bureacrats play at the margins. They’ve let the bankers have their single currency tp facilitate trade. Now, as the prof says, it’s crunch time and none of the ground work has been done.

    Not doing the hard work. Does that sound familiar?

  • Jim.

    In America, we have fifty “laboratories of democracy”, the states. The idea is, ideas percolate through the states and best practices are adopted by other states, or even at the national level. This has worked very well for us, and is one of the greatest benefits of Federalism.

    What VM seems to be proposing is a monumentally stupid inversion of this strategy– instead of adopting German best practices, Europe would be deliberately institutionalizing WORST practices. It’s worth saying gain. This is monstrous, calamitous stupidity, scribing into stone a system that cannot help but fail, and simultaneously institutionalize brazen theft from the only players in this game that are playing above-the-board.

    If the rest of the countries of Europe “can’t be (as careful and hardworking as) Germany”, THAT’S TOO [tragically] BAD FOR THEM. Of course, I think you’re underestimating what standards they could live up to if they had to.

    VM has not made the case as to why Germany needs Europe badly enough to condemn itself to perpetual slavery for Europe’s sake. There is no foreign policy issue so challenging that Germany (with US support) can’t handle. Markets of customers who ask for credit and then insist you pay their tab really aren’t worth having. Guilt only works if you respect the person guilting you; there’s no reason to view the French or Greeks with any such consideration.

    Europe built on unpaid German toil, or Europe scrambling to rearrange itself sustainably; there’s no reason not to choose the second.

  • How will it play out? My prediction is Greece exits the Euro, Europe, China, and the U.S. dip again into recession.

    Less certain: China may crack, the economy especially, in which case a transition to one man rule is a possibility.

    Here in the old U.S. of A I assume our banking system is in better shape than 08, in which case we will come out best of the three: real hourly wages will continue to decline (for a far as the eye can see) and Obama may lose his job.

  • Gut feeling tells me that Western Europeans on the continent, from whatever country, will prioritize choices that further peace & stability.
    Whatever course of action is good for making sure peace & stability reign, that will serve as the guide post. This is deeply ingrained in WE, less so in the UK and less less so in Greece. Of the other troubled economies – Ireland, Portugal, Spain, Italy – only Italy experienced WW2.

  • Mark Michael

    Rick Moran at American Thinker posts that it looks like the voters of Ireland are going to soundly endorse staying with the euro. He cites an AP story. He also claims polls now show the Greeks are going to vote for parties that advocate staying with the euro. See:


    June 1, 2012
    Ireland votes for austerity policies in EU fiscal treaty
    Rick Moran

    Official results from more than half of Ireland’s 43 constituencies demonstrated a decisive victory for the government of Prime Minister Enda Kenny, which courted unpopularity by insisting that Ireland — already four years into a brutal austerity program that has slashed 15 percent from many workers’ incomes — had no choice but to vote in support of yet more cuts and tax hikes.


    It also appears that the Greek voter is going to vote for the austerity coalition that negotiated the torturous agreement with the EU and IMF last spring in the elections held later this month. It seems that people living in a democracy can make the right choice when confronted with an even more unpalatable option.

    The AP story is here:

    What for whatever this adds to the discussion: maybe the voters in Ireland and Greece are able to sort through the incoherent mishmash of non sequiturs, predictions of financial collapse, contagion — water running up hill, your firstborn child being sacrificed to Molleck – that the Political Class, the bankers, the holders of that (potentially) worthless or at least highly discounted “sovereign debt” in Greece, Portugal, Spain, and yes, perhaps Ireland too are screaming at them continuously and make up their own minds.

    The downsides of leaving the euro at this point are worse than biting the bullet and taking their austerity medicine IMO.

    BTW, WRM, your discussion of Germany’s Ludwig Erhart’s Deutchland Miracle with its sound currency was good to see. It is great you spent time talking to knowledgeable Germans and gained a better understanding of German thinking. BOTH the hyperinflation of the 1920s Weimar Republic AND the sound money of Ludwig Erhart of the 1950s forward inform the German position of monetary policy.

    Chancellor Kohl’s political decision to let the East Germans swap their East German deutschmarks 1-to-1 for West German Deutchmarks was a bad economic decision and made the integration of East Germany into the West much more expensive and lengthy than it needed to be. But the Germans toughed it out and spent over a trillion US dollars equivalent to rebuild the East’s infrastructure, worthless factories (too polluting, etc.).

    They should have converted it closer to the 4-to-1 black market exchange rate – a small premium over that, but not more. Then the East German workers could have found jobs more readily, given their poor skills, lack of productivity. Instead, many cities had unemployment over 50% for quite a few years.

    Anyway, this Irish vote is a positive sign IMO. I know, many will disagree, and if the Political Class does the wrong things, they may be proven correct and me dead wrong!

  • Jacksonian Libertarian

    “Germans do not trust policy makers to do this job honestly, and they look with real distaste at the way governments in “Latin Europe” (and in the US, by the way) have inflated their currencies partly to give politicians more room to offer favors to voting blocs and well connected economic interests.”

    “Germans distrust German populism—in the not too distant past, 2/3 of German voters supported either the Nazis or the Communists, and nobody liked the way those experiments worked out.”

    Either the German’s trust the Authorities or they don’t. I think on a question this fundamental to their wallet and future they will trust no one but themselves. After all why should they trust the Authorities, look what a mess they have made of things.

  • Eurydice

    Yes, this is it. Like all the EU members (like all humans, really), Germany has contradictory goals. They want a non-political union, but its foundation is a political ideal. On the one hand they have quantifiable numbers – we sold you this, you owe us that. On the other, they have a non-quantifiable ideal – their national identity within a united Europe.

    The problem with non-quantifiable ideals is that their costs are ongoing and open-ended. Like “promoting democracy” or “maintaining the balance of power” or “preserving the American Way of Life,”Constructing a United Europe” is something that has to be ingrained as a mission within the public consciousness. For this to work, Germans can’t be thinking “My taxes are going to bail out the Greeks,” they need to be thinking “It’s my responsibility to construct a United Europe.”

    I’m not sure how Merkel & Co, can switch from “Not a penny more!” to “EU or bust!” (the Dance of the Seven Veils?) – maybe the German public really does trust its politicians that much.

  • Anthony

    @10 Corlyss, yes it does; regrettably all too familiar….

  • John Nelson

    The socialists ran-up trillions of new government debt, on top of the government debt they had already accumulated.
    All the Leftists accomplished was digging a deeper hole for their respective countries and postponing the day of reckoning.
    A very, very bad day is coming for Europe and the U.S.A.

  • rvwaldenfels

    Excellent analysis. This is the first time that I, as a German living in Germany, have read an article in the anglophone media that correctly portraits the mood and the dilemmas here in Germany.

  • I am one of those who automatically ascribe Germany’s strong preference for sound currency to the Weimar inflation of the 20s. Those days are at the very edge of living memory and so it makes sense that this German virtue may have arisen from something that happened since. But what? Oh yes, that little unpleasantness called WW2. I have German and Austrian friends who witnessed German recovery in the 50s and I have to admire the Germans for making that comeback. After WW2 it would not be surprising if a country in Germany’s position simply gave up. It will be interesting to see what course Germany takes now that we seem to be getting down to brass tacks.

  • donzi_boy

    You have left out one element of this equation and that is America. The current crisis is causing a significant devaluation of the EURO. The immediate effect on us is a decline in the growth of American manufacturing( which has been driven by a 40% devaluation against other currency in the past 3.5 years). The Obama administration desperately want stimulus in Europe and the Germans will agree if the US offers a dollar for EURO match. Obama has already done this once by stealth but likely won’t be able to without a hew and cry being raised by the Republicans. The Germans want to save the EU and failure of the EURO will rupture the EU, but they are going to play poker with Obama. He has already shown that he’s the sucker at the table.

  • Chidra

    Otiose8 put it in a nutshell: “What the Europeans are desperate for is a solution that will let them eat their cake and keep it too.” They’ve run out people to foot the bills for their extremely generous social security system, and the Germans, for all their guilt, and their desire for a closely integrated Europe, are loath to stump up any more. The rest of Europe feels it is entitled to have it’s debts paid by the Germans – perhaps for historical reasons. But the younger generations of Germans, with no personal experience of WW II, probably feel that their nation has paid its debts, and are no longer willing to be blackmailed. They see where profligacy has led the PIGS, and have no wish to go down that path. To work hard, and save is a virtue, not a sin, a lesson some European nations and their feckless people have forgotten. The Germans haven’t.

    @ WRM : #nitpicking “That is only half of the story—and the small half at that.” – Halves, by definition, are equal. You can’t have a larger half and a smaller half. 🙂

  • Joe

    Interesting analysis as always. However, I am not at all convinced that Europe writ large or Germany face an either-or proposition here, or that EU members have the capacity to take decisive action quickly enough to prevent cascading crises in any case.

    The EU nations and their banking systems face a combination of fiscal, liquidity, and productivity problems with the mix and severity varying by country. A common theme is unsustainable levels of debt that will have to be repudiated via some combination of outright default and monetization / devaluation. Germany is not rich enough to shoulder the whole load. The Germans know this and are not likely to play along.

    A major obstacle to finding a solution is the twin assumptions that once countries join the Euro they can never leave (increasingly risible) and that if they leave the Euro they can never return.

    I think a more likely outcome (and in some ways a near best-case one) is that Germany and its allies hold the line on large scale bailouts and maintain a reasonably strong Euro, while individual countries (e.g. Spain, Greece) leave the Euro.

    Once out some countries will likely spiral down the tubes (my prediction for Greece) but many (e.g. Spain) will likely be able to clean up their balance sheets fairly quickly by devaluing, defaulting, and implementing some degree of labor market and entitlement reforms. I expect that such countries will be allowed to rejoin the Euro within a few years – at a conversion rate that reflects a market assessment of their fiscal health and future productivity – hopefully in a more “German” state.

    This process will be painful enough (massive wealth destruction, reduced standards of living, inflation and unemployment) that salvageable countries will seek to avoid it by making less drastic reforms.

  • Eurydice

    @WigWag – the fewer “allies,” the better. Germany and its allies can break away into a “NEURO” and then, in a year or so, they can change that unmusical name to “the Deutsche mark.”

  • Corlyss

    Am I the only one here who things that German populism would have come to naught if German industrialists hadn’t backed Hitler to the hilt?

    Let’s face it. Europe is full of people who, as polities, resoundingly do what they’re told in sheep-like fashion. The stroppy ones came to America. Lucky for us; unlucky for Europe. Per Prof. Eugene Webber’s course on Western Tradition speaking of the post-30 years war landscape:

    “Equally clear to contemporaries was the fact that the great mass of people would eventually accept whatever was given or imposed by their rulers, including religion. They might rebel at times but it was usually about bread or taxes, not higher principles. Material reality and their precarious existence weigh too heavily upon them. Their horizons were narrow, their submission traditional and this worked in favor of the established authority whatever its creed or its political color. ‘The people’ were there to be used and manipulated by a tiny political class and would remain so for a very long time.*”

    They still are.

  • Snorri Godhi

    “The French, Italians, Spanish and a number of others argue for a frankly political currency system”

    That should be: The French, Italian, and Spanish ***ruling classes***, and the ruling classes in a number of other countries, argue for a frankly political currency system.

    That the people of those countries do not agree with their ruling classes, can be seen by the fact that Greeks are voting with their bank accounts, transferring money to countries where the ruling classes are dead set against inflation.

    “in the end Germany is likely to choose Europe even if that means choosing a messier monetary regime.”

    I said it before and I’ll say it again:
    What the Germans decide is ultimately irrelevant. Unless a solution is found that satisfies “the Germans”, at some point one of The Netherlands, Austria, and Finland will leave the Eurozone, followed by the other two. At that point, it’s difficult to believe that Germany will stay in.

  • Glen

    Germany is likely to choose Europe even if that means choosing a messier monetary regime.

    If this is the insight that issued from Professor Mead’s recent trip around Germany, then either he didn’t talk to enough regular Germans, or he badly misread the mood of the nation.

    First, “choosing Europe” means much more to Germany now than simply a “messier monetary regime.” It mean profoundly lower living standards for Germans for the foreseeable future as they pay for the lower economic productivity and more corrupt governments of so-called Latin Europe.

    West Germans were willing to suffer in the cause of reunifying their own country. But they have been shocked at the cost and the ineffectiveness of their redistributive gratitude towards formerly East Germany.

    Germans will not blindly follow their leaders into “more Europe” without iron-clad guarantees that they are not repeating the mistakes of national reunification. And because they do not have the same sorts of familial ties with Latin Europe as they did with their fellow citizens in the East, they will not permanently saddle themselves with the responsibility of supporting foreigners.

    Human beings evolved as tribal animals. A few generations of global jet travel and instantaneous communications can’t undo millions of years of neurobiology.

© The American Interest LLC 2005-2017 About Us Masthead Submissions Advertise Customer Service
We are a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for us to earn fees by linking to and affiliated sites.