Last week brought another spate of rumours that Germany was about to capitulate over a radical new plan for safeguarding the euro.
This time, the idea on the table — placed there by Italian Prime Minister Mario Monti — was that the eurozone bailout fund, the European financial stability facility (EFSF), might be allowed to buy up Italian and Spanish bonds in the hope of driving down yields and preventing full-blown budgetary crises in Rome and Madrid.
There are a number of problems with that notion, not least that the EFSF and its successor, the European Stability Mechanism (ESM), which comes into being next month, only have about €440-billion between them, which might rapidly start to look paltry once they begin to bet against the might of the financial markets. But the biggest issue is the same one that has dogged so many of the proposed “grand bargains”, “comprehensive solutions” and other supposed answers to the eurozone crisis over the past two years: it would do nothing to tackle the deep economic divisions that have riven the single currency from its inception.
In their new book Crisis in the Eurozone, Costas Lapavitsas and his colleagues in the Research on Money and Finance group at the School of Oriental and African Studies in London meticulously set out the grinding process by which Germany — already highly competitive at the start of the single currency — has beggared its neighbours, and its own workers, by driving down wage costs across the economy, becoming ever more dominant within the 17-member eurozone.
Meanwhile, instead of building up productive potential to sell into the market on their doorstep, the peripheral economies saw lending to both the private and public sectors explode.
There were several forces driving this “financialisation” of the periphery, as Lapavitsas calls it. German and French banks, emboldened by the strengthening euro, expanded operations in those countries rapidly. Poor consumers faced with stagnating living standards took advantage of newly lax borrowing standards and low interest rates to maintain their lifestyle. And in Spain and Ireland in particular, developers embarked on a huge construction boom funded by cheap loans, as the European Central Bank (ECB) set rates for the giant German economy, where inflation was much lower.
Throughout the first decade of the single currency’s existence, the peripheral countries ran current account deficits year after year, filling the gap with borrowing, while Germany consistently ran up surpluses, exporting goods to its less competitive neighbours.
Profligate governments, which have borne much of the blame since the start of the crisis, were only one part of this wider story; much of the increase in public sector deficits happened after the crisis broke in 2008.
Today, the problem is that most of the ideas in play for resolving the crisis fall into two categories — the financial and the institutional. Eurobonds, bank recapitalisations, giving the ESM a banking licence, urging the ECB to buy bonds — these are all financial fixes, aimed at preventing the banking sector from going bust, and allowing governments such as Spain and Italy to borrow enough cash to get by.
Alongside these — pushed by Germany, but also by those outsiders, including David Cameron, who glibly assert that more integration is the answer — are a new pan-European banking union and the “fiscal compact”, with its supervision of national budgets by Brussels, institutionalising the austerity that has been Berlin’s solution to Greece’s woes.
These two clusters of ideas are yoked together, because, politically, Germany will find it impossible to justify bankrolling bailouts or standing behind its troubled neighbours’ debts without imposing stringent conditions.
As the actions of the “troika” that oversees bailouts in Portugal, Ireland and Greece has shown, “more Europe” will mean an unprecedented surrender of sovereignty over decisions — from the minimum wage to the civil service payroll — that would usually be deemed national. Yet without such an abrogation of power, German voters — the Swabian housewives of political lore — would charge their chancellor with throwing good money after bad.
Even if this democratic knot can be cut, though, there is nothing here to deal with the deep-seated imbalances between über-competitive Germany and the rest, entrenched by the fixed currency, which prevents the peripheral countries from devaluing their way out of trouble.
François Hollande has managed to win some concessions to growth, bolting ideas such as an expansion of the European Investment Bank onto the existing recipe of austerity, mass unemployment and bank rescues.
But there is no strategy for rebuilding the Greek, Irish or Portuguese economies — let alone the Italian or Spanish — on a more sustainable basis. The only way for them to close the gap is through so-called “internal devaluation”: making their own goods cheaper by pushing down wages – this in countries that have already endured deep recession and social upheaval.
So even if the complex power-play at the latest make-or-break summit on Friday leads to what looks like a deal, don’t be fooled: the periphery will still face an all-but-impossible challenge over the coming decade: one it’s extremely hard to see voters signing up for over the long haul. – guardian.co.uk © Guardian News and Media 2012