Eurozone pain, hurts so good
It seems every Monday morning, the US newspapers greet their readers with the latest news of the eurozone’s painful sovereign debt negotiations, not to mention all the politics, institutions and personalities wrapped therein. The tick-tock accounts of every phone call and meeting are important and fascinating reading, but they’re not as important as the real news coming out of this crisis: Europe is changing — painfully and haltingly, but for the better.
The Continent is moving to a point where increased fiscal coordination will redefine the nature of sovereignty for euro zone member states. Economists have long been saying that it’s going to take an extraordinary amount of pain to right the wrongs of the euro zone’s finances. Europe has already suffered through a lot: liquidity crunches in the banks (see today’s ECB rate drop), recession, riots and technocratic governments taking over the peripheral states.
But what must be noted is that Europe would never be where it is today — on the verge of a sounder fiscal path forward — but for all this pain. It has all been necessary, in order to right the course of a eurozone that was, like the US, on an unsustainable path.
This may sound like strong medicine, so strong that it may cure the disease but kill the patient, but ask yourself this: Would any of the austerity and return to fiscal sanity have happened in Europe if Germany had simply cut the debtor nations a fat check one and a half years ago, when this crisis came to light? Would the problems of Europe have been solved? The answers to both are, of course, no.
With the latest euro summit meeting about to happen, we’ll likely see a good political story as Angela Merkel and Nicolas Sarkozy smooth over their differences and start to steer the EU ship of state towards a better treaty. But a good political story is not the same as a good market story — the markets, as we know too well, are crueler. They want to see the fat check.
They want the problems resolved, even before they start. But nothing changes when a fat check is written, and what the euro zone member states needed much more than a bailout was the type of structural change that is now underway. Markets will have to wait for Angela Merkel to sign on before any bailout happens, and until then, they will continue to inflict pain on the euro zone by cutting credit, playing tug-of-war with bond spreads and complaining, as a JP Morgan analyst recently did, about the “intertemporal dimension” of the crisis.
If it sounds like I’m blaming the markets for riots and political upheaval in the real world, that’s not exactly true either. As I’ve said before, Europe’s path was unsustainable. The markets, after all, had to inflict this pain in response to the perceived collision course. It’s only through market pain that governments and political institutions will realize they have no choice but to fix their spending habits and resolve the crisis.
We should cheer that Merkel hasn’t been bullied into writing a check just yet– because as soon as this crisis is on the road to resolution, the next question will be “could this all happen again?” The re-writing of the EU treaty that Merkel and Sarkozy are proposing is a solid step in making sure that history doesn’t repeat itself — and a step that might not have been taken had the fat check been cut.
In a G-Zero world, the US is no longer the country holding the bailout checkbook, as it did in financial crises in Russia, Latin America, Mexico and Asia over the last two decades. For the first time in modern history, countries and regions are going to have to navigate these crises themselves. Europe is merely the first to go it alone, but others will follow.
It’s hugely important that Europe take steps to prevent a crisis like this from happening again, not only for its own viability, but to help draft a new blueprint for the rest of the world. By all accounts, the endless eurozone summit meetings, though frustrating and painful for Europe’s citizens and its bankers, are putting the eurozone on the right path.