Angela Merkel's return to Europe
The question for Merkel is which risk-minimizing strategy she should choose
Posted: October 2, 2013
By Jean Pisani-Ferry
BERLIN - It is not entirely clear who - Franklin Delano Roosevelt or Peter Parker (Spiderman) - first said that "with great power comes great responsibility." But it is an adage that applies perfectly to German Chancellor Angela Merkel.
Merkel's resounding victory in Germany's recent general election gives her a mandate that few of her fellow world leaders enjoy nowadays. In a country obsessed by the costs that the euro crisis may inflict upon domestic savers, the anti-euro party Alternative for Germany received less than 5% of the popular vote, which gives Merkel exceptional political strength. Even the fact that her center-right Christian Democratic Union fell short of an absolute parliamentary majority is a blessing in disguise. The grand coalition with the center-left Social Democratic Party that she is likely to form will command a super-majority of 503 seats in the 630-seat Bundestag.
For several months (at least), the rest of Europe has been awaiting the result of this election. The biggest question now is where Merkel will invest her enormous political capital. Her choice may well shape the future of the continent.
Europe is in better shape than it was a year ago, but it still faces an uncertain future. Economic recovery is undeniable, external imbalances have receded, and real-exchange-rate misalignments have diminished. But aggregate per capita GDP remains below 2007 levels. In Greece, per capita income hovers around its level in 2000; in Italy, it remains around its level in 1997.
Moreover, southern Europe is plagued by massive unemployment, especially among young adults. And debt levels - both public and private - remain perilously high.
Against this background, one strategy is to trust that the healing will continue to proceed, especially in an improving macroeconomic environment. But significant risks remain.
Some of these risks are financial: The road ahead will be a bumpy one for markets, and a return of risk aversion could soon affect the European Union's most fragile countries. Some are economic: Barring a lasting (and still elusive) growth acceleration, the objectives of boosting competitiveness and achieving debt sustainability remain partly in conflict. And some are political: Though Europe's citizens have demonstrated an extraordinary degree of commitment to the euro, in several countries governing coalitions are precarious and populism is on the rise.
Until a path back to prosperity is clearly mapped out, these risks will remain. So the question for Merkel is which risk-minimizing strategy she should choose.
Begin with the basics. Merkel could first help to restore trust in Europe's economic fundamentals. Consider the single market for goods, services, and capital - that celebrated backbone of economic integration. Today, it is in bad shape.
The single market for energy, for example, is dysfunctional; otherwise, Germany would not build solar farms, which would be built in southern Europe instead. The digital market is not unified. And capital markets have fragmented in the wake of the euro crisis. There can be no trust in Europe until serious repair work is completed.
Second, Merkel could help to restore trust in Europe's political institutions. The eurozone crisis has weakened Europe's complex system of governance. The European Central Bank has emerged as a strong and bold institution, but the European Commission and the Eurogroup of finance ministers have not proved equal to challenging conditions.
In these circumstances, Germany and other countries could send a strong signal by appointing exceptional individuals to the next European Commission. A strong Commission is not the solution to all problems, but it is a precondition for solving many of them.
Third, Merkel should help to restore hope in southern Europe. Contrary to prejudices, the southerners have largely done their part. They have delivered fiscal consolidation, and many countries have also implemented significant structural reforms. They now need capital and investment to strengthen their tradable-goods sectors. And they need foreign demand to foster export growth.
Lucid minds in Germany recognize that adjustment in the eurozone is a two-way process. It is urgent to put in place mechanisms that encourage private capital to return to southern Europe (this time to invest in productive assets), and to sustain demand in Germany and northern Europe.
Fourth, reform of the euro system has not been completed. Discussions on banking union are still under way, and Germany is reluctant to mutualize risk. But fully separating bank risk from sovereign risk implies that the ultimate backstop must be a common one.
Beyond a banking union, an effective and resilient monetary union may ultimately require a sovereign-debt-resolution mechanism, a common budget, partial debt mutualization, or a common Treasury, to name only the most discussed proposals. These are issues for debate, but one thing should be clear: The eurozone should not aim to achieve the minimum necessary under favorable conditions, which would expose its leaders to charges of poor contingency planning should crisis conditions reemerge. Rather, the eurozone should aim to achieve the minimum required to remain resilient under such conditions.
Finally, it is time for Germany, the country that invented the concept of European political union, to give it form and substance. The idea that monetary union would naturally give birth to political union proved to be wrong. But the idea that monetary union requires a degree of solidarity that can be underpinned only by some form of political union has been vindicated.
Translating this abstract concept into reality is the most difficult of all the challenges raised by the crisis. It is here that Merkel's political capital will matter the most.
Jean Pisani-Ferry teaches at the Hertie School of Governance in Berlin and serves as the French government's Commissioner General for Policy Planning. Until spring 2013, he was the director of Bruegel, the Brussels-based think tank.
© Project Syndicate, 2013.