x Abu Dhabi, UAEFriday 28 July 2017

German economic policies keep the euro in the doldrums, currency expert writes

Europe’s single currency won’t collapse, but it won’t recover, either, says David Marsh in his new book. Instead, he predicts years of slow, incremental economic growth, writes Paul Hockenos

A protester tries to stop riot police during a demonstration in Athens, Greece, earlier this month. The country  has suffered from ever-widening deficits as Germany’s economy has recovered. Kostis Ntantamis / AFP
A protester tries to stop riot police during a demonstration in Athens, Greece, earlier this month. The country has suffered from ever-widening deficits as Germany’s economy has recovered. Kostis Ntantamis / AFP

Paul Hockenos

The trickle of upbeat news these days from the euro zone might tempt one to guarded optimism that Europe’s economy is out of the woods and the single currency is back on track. After all, the euro zone economies inched out of recession earlier this year, and the problem children Portugal and Ireland posted encouraging numbers for the first time in ages. The euro itself is stronger than ever against its arch rival, the dollar. And under the steady hand of the European Central Bank (ECB) president Mario Draghi, the bloc members are piecing together a joint banking union, one of several new fundaments to support the euro.

But those who dare to hope are certain to have their expectations dashed, argues the widely published economics journalist and euro expert David Marsh in his new book, Europe’s Deadlock. “A grand new beginning” is highly unlikely, concludes Marsh. “The nightmare of a total euro collapse will be avoided, yet deadlock and discord will linger on.”

Marsh is not a euro-sceptic per se, in league with the likes of narrow-minded nationalists who heap disdain on the very idea of a single European currency – or, for that matter, of a common Europe. On the contrary, he believes that a common money could make sense in a tightly bound, economically integrated Europe in which the credo “all for one, and one for all” prevailed rather than “me-first” thinking. But that’s not the case today, he argues, and Germany, above all, has set a tone that damns the euro to a drawn-out purgatory of perennial bickering, crises and ever greater discrepancies between the EU’s wealthier and poorer nations. Why so grim a take when, it seems, things are just starting to look up?

To begin with, argues Marsh, the hard-nosed austerity measures that Germany has imposed on the southern Europeans will lay them low for years, if not decades to come. Marsh can see no way that countries such as Greece and Spain, with their weak domestic demand and soaring unemployment, will ever crawl out from under the mountains of debt heaped upon them. They’re trapped in a vicious circle of falling tax revenues and uncompetitive industry that will keep them down and out rather than helping them back on their feet.

In the old days, weaker economies, often but not always in southern Europe, would have devalued their currencies to make exports attractive on the world market. Today, however, this path is blocked. Monetary policy is no longer in their own hands but rather in those of the ECB, which is run according to the deflationary logic of Germany’s once mighty Bundesbank.

The euro’s seminal flaws, Marsh argues, were embedded in the monetary union at its founding for all to see – and indeed many did see them and called out. But political priorities trumped economic common sense. The French saw monetary union as perhaps their last chance to tie down a Germany that was rapidly outgrowing the Franco-German partnership that had underpinned postwar Western Europe. By curbing the power of the Bundesbank once and for all and banishing the Deutsche mark, the French hoped they could keep pace with their powerhouse neighbour. Knowledgeable and highly respected economists from across Europe warned that a common currency couldn’t work unless it was ensconced in a real political union – a United States of Europe – and bound together by tightly integrated economies. This, responded the euro’s champions, would come later; at the time, such notions of a united Europe didn’t have the slightest chance of approval anywhere in Europe. Indeed, they still don’t.

But talk of laying further foundations after the euro’s launch fell by the wayside when the euro took off with such verve in the early 2000s. The low-interest credit that every euro member could access fuelled high times in countries such as Greece that could now borrow on the same terms as Germany. The poorer European countries saw the chance to finally catch up with their wealthier counterparts in northern Europe; they were encouraged to try, not least enabling them to spend liberally on exports from northern Europe.

As Germany’s economy recovered later in the decade, thanks in part to euro-zone conditions, in part to a new competitiveness enhanced by domestic restructuring, its trade surpluses – and those of its northern neighbours – burgeoned while the zone’s peripheral countries, among them Greece, Ireland, Spain, Portugal and Italy, suffered ever widening deficits. When the credit markets finally woke up to the economic reality in the south, the cost of money and debt financing soared and the ostensible wunderkinder found themselves staring bankruptcy in the eye.

But rather than the full-scale reform called for, the euro members addressed the union’s shortcomings by taking the path of least resistance every time, agreeing much too late to one temporary stopgap measure after another. It appeared that no one was in charge. Rather than a central bank with real powers, the crises’ management was left, according to Marsh, to a “cacophonous collection of European states attempting to combine as much control as necessary with as many elements of national sovereignty and self-determination as possible”.

The array of half-hearted reforms, argues Marsh, simply don’t add up to the kind of wholesale revamping necessary to make a currency union work. The ECB, for example, still lacks the powers necessary to function as a real central bank, like the Bundesbank did or the Federal Reserve in the US does today. When Draghi took over the reins in 2011, he declared with bombast that: “The ECB is ready to do whatever it takes to preserve the euro.” These words echoed around the world, instilling confidence again in the euro. But, as Marsh argues, the ECB remains a weak hybrid of vastly different conceptions. A new lever in the arsenal of the ECB was the means to intervene to buy the bonds of hard-hit, debt-strapped countries. Yet, according to Marsh, the effect of this proclamation was probably more psychological than real. The ECB cannot intervene at will to stabilise a country as other national central banks can to bolster regions. The ECB cannot engage in direct support on domestic bond markets to lower interest rates and ease credit commotions. The ECB, claims Marsh, is thus “the prime symbol of the unfinished state of monetary union – a single monetary body facing not just one political counterweight, but 17 different nations with more or less sovereign powers”.

And then there are the new powers of the EC to proctor the budgets of euro-zone members. But these, too, argues Marsh, may yet turn out to be fig leaves; certainly, they are no alternatives for a genuine common fiscal policy. Indeed, the commission possesses no recourse to remedial measures should an offending nation state, say with higher-than-specified spending, buck its authority. Likewise, the permanent rescue fund, called the European Stability Mechanism, has only €500 billion (Dh2.47 trillion) at its disposal. This is unlikely to be anywhere near enough should bigger economies such as Italy and Spain go down the tubes.

The banking union, which is currently under construction, will likely also prove a half measure.

The purpose is to merge Europe’s regulations on banking and finance to create a secure, efficient European banking system.

This makes all the sense in the world, says Marsh, as it would “reduce the threat of financial flare-ups, restart credit flows to hard-up countries, and enable better services for consumers and businesses”. But again, the will is lacking. Today’s nation states are reluctant to give away their rights to supervise their own banks.

Not surprisingly, adds Marsh, Germany is the most reluctant of all, insisting in this case as well on having its cake and eating it, too. Indeed, Germany has not stepped up to be a real leader rather than a co-antagonist in the crisis. With Merkel at the helm, there won’t be a real fiscal union based on genuine power-sharing anytime in the near future. The likes of Eurobonds, the pooling of debt and a taxed euro bloc budget are all ideas that Germany rejects out of hand.

Marsh predicts a drawn-out decline for Europe, which will see up-and-coming continents such as Asia surpass it. Since a “return to national currencies would be a journey of horror”, argues Marsh, “muddling through is the preferred option”.

The titbits of good news of late are only blips on the radar screen, Marsh would argue, not the turning point that Europe’s overwhelmed politicians are trying to sell their citizens.

Paul Hockenos is the author of Joschka Fischer and the Making of the Berlin Republic: An Alternative History of Postwar Germany.