“Financial markets” keep getting what they want out of Europe, including the Greek people’s loyal decision to elect the status quo parties into government. But it keeps not working, the subject of my latest column. Skipping to the end:
Peripheral countries need either more fiscal support from Germany, greater inflation tolerance from Germany, or monetary independence from Germany so they can pursue the former two objectives without active German cooperation. It’s easy to see why Germany is not thrilled about these options, but the facts are the facts nonetheless. And the longer the German government and the institutions it controls insist that mainstream parties sign on for the triple-nein, the more inevitable it becomes that extremist groups will take over sooner or later.
To discuss the merits a bit, the great appeal of Option 3 is that it lets everyone stay bitter. The eurozone can break up, Germans can blame irresponsible southerners and southerners can blame imperious Germans. Option 2, by contrast, seems to be clearly the least costly, especially since its major practical downside for Germany (an erosion of “competitiveness”) would happen under Option 3 anyway. The current arrangement whereby Germany achieves full employment by denying its workers any wages is not a sustainable path, so you might as well unwind it in a way that makes the rest of the continent happy.
But this seems to be getting the least active discussion. Instead there’s a lot of focus on Option 1. Option 1 seems calculated to maximize the quantity of ill will generated, in turn minimizing the quantity of actual fiscal support delivered.