Tuesday, 29 May 2012

A Letter to Angela Merkel

Dear Mrs Merkel

I know that you have a lot to deal with at the moment so I thought I would send you some ideas on how you could manage the problems in Europe to do with Greece.

I understand that you are in a difficult position as the chancellor in Germany and a leader in Europe.  Of course, your first responsibility lies with the German people and you must defend their interests first and foremost.  But as the leader of Germany, you also have a crucial role to play in Europe.   And leadership in Europe is needed now more than ever.  Do you want to be remembered in history as the German Chancellor that let Europe crumble or as the saviour of 60 years’ worth of post-war integration in Europe? 

I can understand your stance up until now.  To forgive countries that have spent too much during the boom and have been caught out when the economic tide turns is to make the same behaviour likely the next time around.  It is not easy to be the stern taskmaster in a time of crisis but you have made a stand on principles that in many respects deserves to be applauded.  

However, I would argue that circumstances require a change of tact.  Greece is on the verge of jumping ship and exiting the euro.  While Greece has some responsibility for the mismanagement of their economy, even you must realise that the measures that have been imposed as the conditions for the last bailout package have left the Greek people with a bitter taste in their mouths.  The popularity of the anti-bailout political parties in the election this month is a reflection of this, and if this mood prevails, Greece is sure to depart the Eurozone. 

We both know that, while tough on the Greeks, Greece leaving the euro in itself will have only a minimal impact on Europe.  But it is what may follow that is the real concern.  Once one country leaves, fears that others may follow will wreak havoc in Europe.  Investors will dump the government bonds and savers will race to grab cash from the banks of any country that is seen to be in trouble and one country to the next - Ireland, Portugal, Spain, Italy, and maybe even France – could be targeted.  The domino effect would see the country fall one by one while the pressure builds up on the next in line. 

Only the solidary of Europe as a whole can stop this from happening.  The indebted countries need to be backed by an overwhelmingly large reserve of funds (much more so that what has currently been made available) and by unwavering support from yourself and the other leaders in Europe.  While I would not like to see Greece exiting the euro as I believe the consequences would be too great, I would not begrudge a decision where Greece is left to its own devices.  If an example is to be made of at least one country, then it is the misfortune of the Greeks to have been the worst of a bad bunch.  But it must stop there or worries will only mount up and panic will ensue.

Now is the time for concessions.  You must consider implementing Eurobonds even as just a temporary measure.  Eurobonds will ease the pressure on the struggling countries by lowering their debt payments, and by making concessions with regard to this, you will be able to get other countries to agree to new fiscal rules which will stop excessive government spending in the future.  The recent change in focus toward growth following the election of the new French president François Hollande should help provide you cover for the change of stance. 

To stay with the current framework is courting with disaster.  Germany’s tough stance will leave it isolated in Europe.  The process which has brought about the integration of Europe may not recover and the single market may disintegrate.  Germans will lose out – they just don’t know it yet.  It is time to use your popularity in Germany and make a case for a softer approach toward Greece and others before it is too late for them and for Europe.

With my best wishes
Your Neighbourhood Economist

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