Merkel is not trumpeting the latest recovering Eurozone meme that I have been debunking on this blog, but her latest speech to her fellow Eurozone leaders is filled with happy talk and a bad idea or two.
The Chancellor is sticking to the politically correct prescription of labor reforms and austerity for Germany’s Eurozone partners. These actions coupled with new crisis fighting measures from the EU have her lauding their accomplishments,
In the past few months it has become clear to everyone that there is a common determination not only to keep the euro, but also to strengthen its foundations…The international community has recognized this; investors now know it.
While their may be a common determination to maintain the status quo in the Eurozone, the fact of the matter is that it will cost trillions of euros more to do so. In order to build a functioning currency zone, each country must have the same fiscal and economic risks. Currently, businesses, consumers and speculators believe quite correctly that the risks of doing business in Spain or Greece with insolvent banking systems, ongoing depressions and huge government deficits are greater than in Germany.
In order to equalize the risks across the Eurozone, the banking systems must be unified and government budgets moved to a sustainable path so that the economies may begin growing again. These actions need to be paid for, and Germany has shown a reluctance to do so. Merkel may be preparing her country to commit the vast sums necessary to accomplish Eurozone integration, or she may be stalling. We will not know until after German elections.
The periphery has not changed as much as Merkel claims in this speech. At best, Spain, Italy, Portugal and Greece have made cosmetic labor reforms. It is not appreciably easier to hire and fire workers in these countries, and they have the unemployment rates to prove it. Furthermore, thehy have not made much progress fighting there deficits due to the negative consequences of the reverse multiplier effect. As they make budget cuts, a correspondingly large drop in revenue occurs. Look at Spain’s budget deficit for the last three years:
The only good news for the Eurozone is that the ECB’s promise to fire up the magic money machine at the first sign of trouble has placed a floor on the price of periphery debt. The promise of OMT coupled with the carry trade enabled by cheap ECB loans to overleveraged European banks has caused a temporary abatement in the downward march of sovereign debt prices.
The lower yields give the Eurozone more time to fight the crisis, but they are not using this time wisely. Markets remain rigid, and it will be difficult to reduce deficits while GDP’s, and therefore tax revenues, continue to shrink in 2013.
As such, the eurocrisis will worsen throughout 2013. Perhaps, this worsening of the crisis will lead to a political breakthrough. Until the all the countries in the Eurozone surrender enough sovereignty to impel the Germans and the rest of the FANG to open their wallets, the crisis will continue.