Can Germany Save the Euro?

Chancellor Angela Merkel of Germany was welcomed to Athens this week with signs saying: “Angela don’t cry. There is nothing left in the larder to take.”

Although we may sympathize with ordinary Greeks who are suffering through a severe recession, double-digit unemployment and a government that cannot honor its spending obligations, that remains an uncharitable and misguided way of framing the problem.

Merkel did not visit Athens to pillage; she was there to try to help the Greeks.

In fact, if the euro is to survive, German policymakers have to play a much more assertive role in the governance of the euro zone. Moreover, other euro-zone countries need to learn to play along and abandon the mind-set of Germany as a quasi-colonial power. European countries need to learn to appreciate the value of fiscal responsibility and get serious about tackling their fiscal and structural problems.

There may be good reasons why not all European nations can be like Germany. The Greeks will not start paying taxes just because Merkel wishes they would. Interest groups, preventing structural reforms in countries on the euro zone’s periphery, are not going to disappear overnight. More broadly, it is next to impossible to build credible institutions for economic prosperity by fiat.

But that only means that the euro zone needs stricter criteria for admitting new members, along with a mechanism that allows for real sanctions against members that misbehave.

Germany is the only nation that has the political capital to urge Europe to put in place such governance mechanisms. With its economic weight, Berlin is uniquely placed to assume a stronger leadership position in reshaping the governance of the euro zone.

To succeed, Germans need to revive the “ordoliberal” ideas that drove the postwar economic miracle of their country. German ordoliberals — exemplified by figures such as Wilhelm Röpke and Walter Eucken — pioneered balanced budgets, independent monetary policy and competitive markets. All three are under attack in the present-day euro zone.

The Germans need to learn to trust their instincts. They were right to be reluctant to grant the first bailout package to Greece in May 2010. Two years and two bailout funds later, if the Greeks don’t receive the next €31.5 billion installment, they will run out of money by November.

It is becoming increasingly obvious that everyone involved would have been better off if the Greek government had been forced into debt restructuring upfront, even at the cost of imposing substantial losses on its creditors.

For the sake of saving the euro, Germans need to regain control of the European Central Bank. With Mario Draghi’s bond-buying scheme, the E.C.B. has become a simple instrument of monetizing the debt of individual member countries. Instead of bailing out countries through the backdoor, the E.C.B. needs to return to its monetarist roots, and stabilize nominal spending in the euro zone.

This may mean more aggressive monetary policy than what has been pursued to date, but it also means erecting a firewall between the E.C.B. and the temptation to serve the immediate liquidity needs of individual euro-zone governments.

It is worth stressing that none of this implies deeper political integration of the Continent. A banking union is emphatically not the solution to our current illness. Nor is a fiscal union.

As Otmar Issing, a former member of the E.C.B.’s executive board, put it in the Financial Times, both ideas are “worthy of satire,” as they “imply huge financial risks for a few member countries and could … destroy the fundament on which such a process finally rests, namely the identification of the people with the European idea.”

Europe does not need a closer political union — it just needs a union that work.

It is not too late to start doing the right thing. If applied consistently and with vigor, German ordoliberalism can save the euro and lay the foundations for economic prosperity on the Continent. But if Merkel misses the this window of opportunity, Europe’s economic prospects will be bleak.

Dalibor Rohacis an economist at the Legatum Institute in London.

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