All countries have choices — even our own, despite assertions to the contrary — but some countries have more choices than others.
Faced with solvency problems around the European periphery, and quite possibly in core banks as well, and also with the underlying reality of intra-Eurozone imbalances, how should Germany react?
Continuing to do as little as possible, and hoping that we can all muddle through, is one option. This risks destroying the euro.
Having the ECB step in via some sort of overt or covert QE is another.
Moving towards fiscal burden-sharing, implying deeper Eurozone integration, is another.
And a big-bang approach to restructuring debts in Europe is another.
In my view some combination of the last three options is probably optimal, if you want to keep the euro. But none of these options are particularly attractive, one assumes, from a German perspective. German industry would be a major loser if the Euro collapsed. The ECB option could undermine the credibility of the euro as a strong currency. Burden-sharing is going to cost the German taxpayer money. And as for the collective restructuring option, Germany is a creditor country.
Today’s article in the FT by Frank-Walter Steinmeier and Peer Steinbrück is a good contribution, from a pro-EU-integration perspective, that can help us see how one section of the German political spectrum views these trade-offs. They are attached to EMU, and so rule out doing nothing. Nor do they like the prospect of the ECB becoming ‘Europe’s “bad bank”‘, a nice political turn of phrase. Unlike Merkel, however, they understand that ruling out these two options has logical implications, pushing the burden of adjustment onto the other two options. For Steinmeier and Steinbrück, this means haircuts for the periphery and the introduction of Eurobonds:
In the case of Ireland, abolishing full state guarantees for private banks would allow their debt to be cut off at the root of the problem, while also letting private investors take their fair share of the burden. A new European framework for bankruptcies of financial institutions should support this.
There are conditions of course:
empowering European institutions to establish tighter controls over fiscal and economic stability, alongside common minimum standards on wage and welfare policies, as well as capital and corporate taxation. In short: we need European government bonds, but we must put an end to beggar-thy-neighbour policies and harmful tax competition within the eurozone too.
It is perfectly understandable that this would be the German position, and anyone who thinks these issues are going to go away is living in cloud cuckoo land. (What our position should be if presented with such a bargain is an interesting question: plenty of costs and benefits on both sides to be considered, which is why God gave economists two hands.)
On the other hand, the Steinmeier-Steinbrück reforms would probably require a new Treaty. Anyone on the Continent who thinks that there is a hope of getting a referendum passed in Ireland, so long as the ECB and EC continue to rule out burden-sharing with senior bondholders, is probably also living in cloud cuckoo land. Time is running out as regards the remaining unguaranteed debt: federalist Europeans should logically be arguing for this issue to be dealt with, satisfactorily, as quickly as possible.