Merkel and Europe's Darkest Hour Since WWII

The hyperbole of statements about the EU crisis hit a new high. Angela Merkel said, “Europe is in one of its toughest, perhaps the toughest hour since World War Two.” Merkel conveniently forgot things like the construction of the Berlin Wall in 1961 and the sharp economic downturn the region suffered in the 1970s. Her claim that the eurozone is on the brink of calamity is true, but there are potential solutions. Some of these solutions may even work.

Germany and France reported stronger-than-expected Q3 GDP. That may not be of immediate comfort to nations like Spain and Greece, which are suffering economic contraction and high unemployment. But Germany and France still need to carry much of the eurozone on their backs, at least financially. Any disintegration of their economies would be a disaster. The markets have been particularly worried about France and its ability to maintain an AAA rating. Its Q3 GDP numbers should help calm those fears.

A meltdown of the region’s sovereign debt conditions also assumes that the new governments in Greece and Italy cannot convince capital markets that their austerity programs are adequate and have been implemented in time. The case for their effectiveness will be a hard one to make, but not by any means impossible. A firm agreement among politicians within the two countries about how austerity measures will work in detail may lessen the pressure of the interest rates on their sovereign paper.

New funds to double the size of the European Financial Stability Facility (EFSF) may not be available for months. However, if there is strong proof that the fund will be replenished, the eurozone will be in a position to help Greece, if it needs more help, Portugal and perhaps Spain. The concern about a sovereign crisis has turned to Italy, which has been called “too big to rescue.” But, it remains possible the new government will back a plan that convinces investors that its economy can recover and that Italy can pay its debts.

Finally, the European Central Bank has said it will not be the lender of last resort for trouble nations. It claims its responsibility is to the area’s banks. But forecasts about the ECB’s plans assume that it would let the credit crisis take the euro under. It is entirely possible the ECB would act rather than have that happen.

Merkel may think the crisis is the worst since World War II. There have been worse, though, and the current one is not far enough along to be characterized that way.

Douglas A. McIntyre