Photo: World Economic Forum
Let’s hope this article by Nicolas Kulish at The New York Times (via Morning Money) represents a turning point in the European crisis.It’s all about how finally, it seems, there’s a serious counter-weight to the German idea that austerity is the only way forward.
With political allies weakened or ousted, Chancellor Angela Merkel‘s seat at the head of the European table has become much less comfortable, as a reckoning with Germany‘s insistence on lock-step austerity appears to have begun.
“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona centre for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.”
From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too. In recent months, powerful voices have joined the chorus, including those of the managing director of the International Monetary Fund, Christine Lagarde, and Italy’s prime minister, Mario Monti. Treasury Secretary Timothy F. Geithner has called repeatedly for Europe to defer budget cutting in favour of some form of stimulus spending.
In thinking about it this way, this certainly puts a very positive light on the developments of this weekend, where right-wingers in the Netherlands and France stunned the political establishment. And in fact in France, both of the remaining candidates (Hollande and Sarkozy) are pushing back against Germany. Hollande explicitly wants Eurobonds, and a renegotiation of the fiscal compact. Sarkozy has been talking lately about having the ECB do more, a specific rebuke of the German hard money ideal.
The fact of the matter is that not only has austerity not worked, and not only has austerity been devastating to the economy, austerity has exacerbated the very problem it was meant to address, which is sovereign debt dynamics.
The most glaring example of this is in Spain, where yields really started to spike in the wake of reform announcements.
The isolation of Germany was probably inevitable if only looking at this chart of PMIs across Europe.
With the French economy tanking, you really do just have Germany on one side of things and everyone else on the other.
How long could that go on before everyone else started to catch on that they were getting a raw deal.
And it’s tough to overstate just how fantastic the status quo has been for Germany.
This chart of French vs. German unemployment over the past decade or so speaks volumes.
And of course, Germany’s borrowing costs are the envy of the world. Here’s a look at the 5-year bond, which just hit a record low yield.
It’s probably not an accident that after this weekend’s big election ructions, it was Germany’s DAX that really got clobbered in Monday trading.
Deutsche Borse AG German Stock Index DAX
Sorry Angela, the jig is up.
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