The Global Economy in Turbulent Times

CHAPTER 52 New Euro Deal: Not the Whole Bazooka¹

The euro “Merkozy” Plan agreed to and announced in Paris by Chancellor Angela Merkel and French President Nicolas Sarkozy on December 5, 2011, targeting deeper euro-integration was a step in the right direction—but did not offer the big bazooka that could really ease market tension. It’s only part of the solution Europe badly needed—it’s not even the solution markets are waiting for. So far, wanting “more Europe” has come slowly and grudgingly, but crucially, lacked proper leadership to deal with a truly systemic crisis.

What’s paralyzing the eurozone is a flaw buried deep within the monetary union’s structure—what an old European friend rightly identified as: the unresolved conflict between the needs of the euro and the independence of its members. Put differently, the link between joint liability of debts and good behavior is missing. Looking back, all those wasted years of skirting the underlying problems, causing rising budget deficits, and building massive debt exploded in late 2009, when Greece first toppled into crisis.

The eurozone tried to stanch the problem with a bailout in May 2010 to no avail because Greece is bankrupt, and did nothing to squelch contagion. By the summer of 2011, Ireland and Portugal had collapsed into bailouts as well, with Italy and Spain now at risk of default. Leaders had pressured countries into gut-wrenching austerity and reform arrangements to stabilize their debt and cut deficits in the hope ...