If Europe’s economically troubled nations need serial bailouts that cost hundreds of billions of dollars after the summit of EU leaders fails to reach a consensus on how to address the sovereign debt problem, Angela Merkel will be blamed. That is true whether or not her philosophy about how to handle the financial catastrophe is correct, because being right may not be a measure for the eventual fate of the region at all. Leaders in the nations with deficit and debt problems cannot stand to let their governments and their histories of spending beyond their means to be blamed. And France needs some excuse for why it could not stand against Germany to add stimulus money to the doses of austerity already handed out to countries that needed rescue or were likely to.
Merkel has at least two reasons for her stance. The first is that she actually believes her position is the only correct one to take Europe forward. The other is that she wants to be reelected in 2013. This second one will be seen as selfish if the European Union breaks apart. The first reason will be considered a mistake, an intellectual and philosophical one. The rational behind her thinking will not save her reputation if things in Europe go very badly.
Widely respected economists, world leaders and capital markets investors who want Merkel to capitulate on her position against EU-wide bonds and for austerity outnumber advocates who stand with Merkel now. Her powerful minority position makes it more likely she will be viewed as the force that collapsed the decade-old union. What will remain at issue for some time is whether, over the very long term, she was right.
It is unimaginable now that anyone would cause a break-up of the union. It would drive some of the countries in the region into deep recessions. That would undermine Germany’s export economy. Since many of the large banks in the region hold significant sovereign paper from the troubled nations, many of those banks likely will need to be nationalized. That will add even further to the debt trouble in each of these countries. Looked at that way, there is no single support for austerity without stimulus.
Merkel believes that nations that are forced to choose among the many ways to use their very modest tax bases develop a discipline that eliminates needless government spending. Her position is based on the belief that Spain, Greece and perhaps Italy have squandered the money that has come into their treasuries for years. That may be so, but how the countries got into their present positions is not important now. It is how they will get out that matters.
Merkel clearly thinks that it is not Germany’s responsibility to aid almost all of its neighbors. Germany may well survive the disintegration of a union that is relatively new by historical standards. But if things go badly, and particularly very badly, Merkel will be blamed, whatever the reasons for her objections.
Douglas A. McIntyre