In an earlier article in these pages I had proposed ways of thinking differently about the future of Europe. The details of how the continent can achieve such a future beginning with the context of the current crisis is the purpose of the exposition below.
This past Sunday, I spent most part of my morning at Mount Vernon – George Washington’s estate on the Potomac in Virginia – with a group of visiting Germans from Pinneberg, a small sleepy town outside Hamburg, Germany – the namesake city of the American hamburger.
The president of the Pinneberg counterpart of my American hometown’s – City of Rockville’s – sister city organization Mr Bernd Hinrichs is a trained financial economist and a German conservative who had spent a lifetime at Unilever, a German multinational, in Germany.
It was clear to me after attending a recent talk about the European crisis by Martin Wolf, the well known Financial Times columnist, at a meeting of the National Economists Club (NEC) at the Peterson’s Institute of International Economics (PIIE) in Washington D C, that the European Union (EU) is in two minds about German recovery and Chancellor Angela Merkel’s insistence on the fiscal compact, preservation of the euro, and austerity for the south: Europe, on the one hand likes the German anchor and on the other hand mistrusts prospective German dominance on the continent.
Mr Hinrichs, a man who is politically active in Pinneberg, echoed similar sentiments – Germans do not want Spain, Italy and Greece to become burdens for the more ingenious and hardworking German people, especially given the traumatic experience of Germany since World War I and until the end of World War II because of inflation.
I had asked Mr Hinrichs if the new Chief of the European Central Bank (ECB), Mario Draghi of Italy, a former Goldman Sachs man from the World War II ally country of Germany, could compound European mistrust in Germany should the situation worsen because of austerity on both the fiscal and monetary fronts for the troubled southern countries. History should lead to wisdom this time around.
The ECB is, quite appropriately, concerned with the low interest rate medicine being administered in the United States by the Bernanke Fed for an extended period of time expecting the monetary transmission mechanism to fix itself like a severed tail of a tropical wall lizard. That the monetary spigots, fully open, can somehow magically cure the ills of the south when drenched in the fountain of youth is akin to looking to the fate of life, clotho, when the fate of death, atropos, being serenaded to by Cassandras such as Nouriel Roubini, is upon the Economic and Monetary Union (EMU). In fact, Europeans have a better regulatory system than the United States whose reformed regulatory law will not be fully in place until 2014.
The EMU needs to engage in some serious policy innovation by leveraging its existing institutional infrastructure, the European Investment Bank (EIB), if the economic civil war is to yield a World’s Fair in Madrid, Rome or Athens when all has been said and done. That Spaniards, Italians or Greeks are engaging in capital flight out of their dysfunctional economies, as Mr Hinrichs had observed in his walk with me on the grounds of Mount Vernon, is not an excuse for the better run European north not to invest in the south. In fact, the data about the flow of financial capital into the south presented by Martin Wolf at PIIE validates my suggestion of the need to do so.
For financial flows at low interest rates, however, to be effective and not pose the risk of another financial contagion, Brussels must enjoin all EMU members who are in contravention of the Maastricht criteria to return to within the treaty’s numerical bounds on a by-country basis in time periods that are variable by-country – a form of customized fiscal austerity.
EMU needs a monetary compact through the EIB conditioned on by-country inter-temporal fiscal austerity to bring Europe back into the Maastricht constraints: only both economic growth and government reform can together put Europe firmly back on the path to the vision of Europe 2050 with Turkish labor market integration as a part of this process to offset, as Mr Hinrichs pointed out, the aging Western European workforce.
As to the United States, we can only hope that Bernanke listens to his bosses in the Senate, especially the 2004 Democrat presidential nominee John Kerry – the Senior Senator from Massachusetts – to do something similar for his country. Else, Bernanke could be gone in short order from the Fed because the country’s patience on job growth is running out fast.