The markets have steadied a bit after their loss of nerve on Monday. But you can't help feeling that it is a bit like a climber, sliding down a glacier to his inevitable doom, who breaks his fall for a while on a crumbling ledge that soon will give way.
Things in Euroland have taken a bad turn for the worse - and it's the politics, stupid. It is not just the uncertainty about the second round of French presidential elections on 6 May. François Hollande, the Socialist leader, will probably win, because it will be easier for him than for Nicolas Sarkozy to pick up votes from those whose candidates were knocked out in the first round. But the energetic Sarko should never be underestimated. He is pitching his campaign hard to gain votes from the hard Right supporters of Marine Le Pen. Herein lies the problem for the euro and for Germany.
It almost doesn't matter who wins the election. The fiscal compact agreed in principle by 25 out of 27 European leaders in January - "a kind of German straitjacket for the fiscally wayward", to quote Stephen King, group chief economist of HSBC - is Angela Merkel's pride and joy, her answer to all the eurozone's difficulties. Typically, like the euro itself, it has been designed to make everyone more like Germany. Hollande has already made it a plank of his campaign to renegotiate the compact. Meanwhile, as Sarkozy moves ever rightwards, striking a strongly nationalist tone (and risking the estrangement of centrist voters), he puts himself increasingly at odds with a compact designed to create greater fiscal union on German terms. If Sarko wins, it is hard to see how Merkozy, never the warmest of unions, can simply pick up where they left off.
This is very bad news for Berlin; and could mean uncertain French intentions continuing long after the elections. Might the fiscal compact be derailed altogether? Given the collapse of the Dutch coalition government as well, this is a real possibility. The Netherlands is no flaky Mediterranean economy, but, with Germany, one of the most solid citizens of the eurozone.
Yet, it has been hit by a strain of euro-contagion. This has nothing to do with debt mountains, deficits or default. The contagion is political and it is this. People are simply not prepared to wear the German hair shirt any longer. The demands of austerity have gone beyond what societies and parliamentary democracies will tolerate. There is a direct link between riots in Madrid, a collapsing coalition in the Netherlands and the deep unpopularity of the whole European project.
For all the crises and endless euro-summits the moment of truth for Europe has not yet arrived.
But it is discernible in the intolerable tension between economics and politics, a tension that has already exploded in Greece, Italy, the Iberian states and now the Netherlands, with France on the brink. The danger in this lies not just in economic dislocation; but in a loss of faith in democracy itself as a system of government that can deliver prosperity, stability and security. In his brilliant The Dark Continent, a history of Europe in the 20th century, Mark Mazower argues that it was by no means inevitable that parliamentary democracy would defeat dictatorship.
Today, it is by no means inevitable that people, widely disillusioned with the political classes and battered by austerity, will retain their affection for democracy and not look for salvation in different and less savoury forms of government.
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All around me I see anger against the euro straightjacket. But I see no anger against the freedom of movement which allowed me to settle in France, or against the safeguards for fundamental rights laid down in the Treaty of Rome, or against the prosperity which the common market brought. I see no anger against the Greeks or Spanish, but solidarity with them and a perception that crisis in one country cannot leave the others unaffected.
We will take our continent back from the bankers, together, and continue to work together for a better future. And if that means different currencies, so what? That never mattered, in the days the European construction was a success story.
I don't think that is correct. In fact I think the opposite is true. People do NOT feel that austerity is a democratically chosen option; they feel it was imposed by banks and a non-elected ECB. The revolt against austerity is a revolt against the kind of autocracy that has been created with the fiscal compact. All economic choices are determined not by the electorate but by a bunch of discredited bankers who, as Paul Krugman notably said, are mostly interested in putting off the day they will have to admit they were wrong.
If we vote for austerity, fine. But who is voting for austerity? No one. And yet we have it, and it is presented as the only option. If we want Keynesian policies, we can vote for them until we're blue in the face, but we won't get them, because a bunch of people cling to their belief that Keynes was wrong and that they are right, never mind the lessons of history both old and recent.
Kick the Austrian school ECB bankers out, is what the vast majority of us want. And we'll get it, too, because democracy still exists despite the huge efforts to pretend the will of the people is irrelevant.
The French election will be the turning point.
It would certainly help if it did fall, as the pound did, but something is stopping it. Understanding that might well unlock the answer to the problem because if whoever is doing so could spend it on something meaningful might provide the stimulus that is needed by all now
1. They are naturally frugal.
2. Most importantly- they protected their manufacturing base from cheap foreign imports as well as offshoring. They charge tariffs equal to or higher to anyone who does biz with them and they incentivize manufacturers to stay put.
The USA allows wholesale offshoring and low tariff dumping on our shores, even as our main "trading partners" tax our exports at higher tariffs to protect their economies. In other words we are on the losing end of a trade war.
Of course, history does not repeat itself exactly, but there might be some parallels to be drawn between now and the 1930s... or possibly the period leading up to WW1.
And all these claims Germany wants to dominate Europe, wants to germanize Europe, etc. show some kind of post war rhetorics but have little to do with reality. In terms of fiscal discipline many Europeans would like to be more German. Like not spending what you can't afford, to have secure pensions that no bank can gamble away and to maintain a solid manufacturing base. We just happen to make goods the world wants to buy, with or without the Euro. Merkel is just doing her job and the average German is far from any ambition to rule over others. The prophets of doom and gloom in the Anglo American financial world will have to accept that.
The contemporary objection I have is that most talk about "German 1920's inflation fear" is happening in English language media ... and not in Germany (or Austria). What you can find in regular news outlets in Germany is pretty much only the same you find in the domestic debate everywhere else: fuel prices/ impact on low incomes, welfare recipients and pensioners. What is maybe a "unique" German twist in that debate is just a result of the last decade's policy: Over the last decade, to increase competitiveness (remember, ten years ago you can find quotes from Spanish, Irish, French politicians urging Germany to reform and lamenting about the "sick man of Europe") wage increases, etc. have often been kept lower than inflation. This year, with several union collective bargaining negotiations scheduled, unions demand (and already achieved in some sectors) significant wage increases ABOVE inflation. - Which is, if I am not mistaken, something many in Europe demand because that will increase domestic consumption.
But more important to me (from a historical science point of view and if you do a little investigation into what is today the state of scientific debate on Chancellor Brüning) a view like the one you present leaves out an important detail, namely the responsibility/ actions by the head of the Reichsbank (central bank) Hans Luther. Here I am referring to the actions taken (or not) in response to the banking crisis in summer 1931 (DANAT bank and subsequent events). And the actions by the French Laval government at around that time in particular because of German- Austrian plans to form a customs and tariff union. Many historians support the thesis that Brüning was actually working towards what was (shortly after he resigned) agreed upon during the Conference of Lausanne (see also Hoover Moratorium): An end to reparation payments. Right after that was achieved, Luther also suddenly reversed the Reichsbank's policy.