Limited Liability Goal

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Berlin’s goal is limited liability

She got an amendment to the Lisbon treaty, which says that any crisis mechanism can only be triggered as a last resort option. She got agreement on her nine points on a future crisis mechanism – intergovernmental, with preservation of the national veto, with collective action clauses to wipe out bondholders, and with strict conditionality. And she utterly defeated any attempt to extend the ceiling and the scope of the existing crisis mechanism.

I would expect that the EU will choke on it.

The economic governance of the eurozone is based on three pillars: price stability, fiscal stability and flexible labour markets. In some idealised setting, these should be sufficient criteria to ensure sustainability, though not at a time like this. So when José Manuel Barroso, president of the European Commission, on Thursday outlined his vision of how the eurozone would get out of this crisis, the three predictable points he made were: more price stability, more fiscal discipline and more structural reforms.
What we are dealing with is an interlinked sovereign and financial solvency crisis, with further interlinkages across member states. The crisis was caused – except in Greece – by large and persistent intra-eurozone private sector imbalances between the centre and the periphery, which gave rise to large financial flows and bubbles.
The policy will trigger a much stricter trajectory of deficit-cutting than what most governments had planned so far. Countries, especially those on the periphery, will be keen to achieve primary surpluses relatively quickly, to reduce the kind of funding stress several eurozone countries will be subject to next year. Through the European financial stability facility, funding is guaranteed until 2013. If they do not achieve primary surpluses by that time, they might find themselves in severe difficulty.
Of course, it should be technically possible to make cuts of such a magnitude that their effects will always outweigh the negative impact of lower tax receipts. This is what happened in Latvia – a rare case of a country that has chosen the hard way to adjust to a crisis without default and devaluation. But can Latvia be a model for Ireland, Portugal and Greece, let alone Spain? Would electorates in those countries tolerate a decade of austerity for the price of staying in a monetary union with Germany?
The way electorates react to austerity will depend very much on whether governments can produce plausible scenarios for the crisis to end. I have yet to hear one. Portugal, Ireland and Greece all claim to be solvent on the basis of unrealistic assumptions about future economic growth.
A comparatively successful example of real adjustment has been post-unification Germany, of course. But lest we forget, Germany put up an estimated €1,600bn in net transfer payments over a period of 20 years after unification, according to one estimate. If there is one country that knows about the difficulties of real adjustment, it must be Germany. German policymakers know better than others that real adjustment in a monetary union requires large-scale fiscal transfers.

So why are they rejecting a “transfer union” then? When it came to unification, Germany wanted to make it work – no matter what. That was the policy. And it was credible. The integrity of the eurozone is also a German policy goal, but not of the same order of magnitude. Having prioritised unification in the past 20 years, Germany is now prioritising limited liability.

Ms Merkel is doing whatever it takes in the pursuit of that goal. On Thursday, she succeeded.




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