KANTOOS writes:
The German government remains under attack for not "taking leadership“ in the Euro crisis. This rests on the assumption that a known solution is ready to be implemented, but the German government just refuses to accept it. That is wrong.
No, I don't believe it's wrong. The crisis in the euro zone is not mysterious. People are proposing lots of different solutions to the problems because they're trying to hit on the magical combination of policies that will win political support from key players—notably the German government. But we know what the matter is. Many members have too much debt. Prior to the crisis, all euro-zone countries were able to borrow on terms which suggested that markets believed the full faith of the euro zone as a whole to be behind individual members, and some governments borrowed too much. After the crisis, markets weren't so sure about what the full faith of the euro zone meant, and spreads between the bonds of different euro-zone governments diverged. For the past year and a half, some euro-zone economies have struggled to make their way out of trouble within the confines of the union: without the ability to depreciate their currencies or set an independent monetary policy. The austerity adopted to try and balance budgets gutted internal demand, leaving those struggling economies dependent on external demand for growth. But where an independent currency would have fallen to help markets clear, euro-zone members were forced to make their adjustment through declines in nominal wages—a difficult and painful process even in countries like Ireland, which have very flexible labour markets. Other euro-zone governments have offered enough help to prevent an implosion of the financial system, but not enough to do much about massive unemployment problems in places like Spain and Greece. Without growth, closing budgets through austerity is like trying to climb a falling ladder.
Kantoos is right that there is no clear boundary between illiquidity and insolvency, but he's wrong to suggest that implies that solutions are unclear. In a situation in which governments don't control key aspects of their own macroeconomies, solvency depends in part on the policies that are imposed by other governments. And illiquidity easily breeds insolvency if panic is allowed to fester.
There are lots of ways to attack this crisis. It could be solved easily enough if the ECB began behaving as a national central bank would. It could be solved through a move to a true fiscal union. It could be solved through Rube Goldberg plans that approximate one solution or the other. It could be solved through massive external support. All that's necessary to solve the crisis is to show markets that the money is there to pay off the creditors. Show it to them, wave it in their faces, and they'll calm down. Then you can take the next step and talk about reforms, integration, and what have you. Germany, through its sheer size, its political clout, and its influence on the ECB, can make sure the money is there to end the crisis. No other euro-zone economy can. It's my understanding that Germany enjoyed its strength within the euro zone when times were good, surpluses were huge, and it was splashing out cash to the periphery. Now it seems to want to shrug and pretend it never asked for its dominant position. At a minimum, it seems willing to use the crisis and its strength to force as much of the cost of adjustment on others as possible, in a fashion that's clearly dangerous for the global financial system.
Kantoos closes:
[B]laming Germany or its government is an unsatisfactory explanation for the political problems we face in Europe.
The crisis is not all Germany's fault, but Germany deserves its fair share of the blame. That's mostly beside the point right now. Germany has a unique ability to bring the crisis to an end, and it is not accepting the responsibility that falls to it given its role, economically and politically, in the euro zone. Frankly, I can't believe Kantoos is shocked that people are upset about that.
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