“It’s when the tide goes out that you find out who has been swimming naked,” the legendary investor Warren Buffet aptly remarked when the global economic crisis hit.
And, as we have found out in the meantime, this is as true for countries as it is for companies. Following Ireland, Greece is now the second euro-zone member to have gotten into massive payment difficulties due to the crisis, almost to the point of national bankruptcy.
Ireland was able to resolve its problems by itself, through a restructuring policy that was painful yet unflinching. It could do so because its economy, apart from its excessive debt burden following the collapse of an asset bubble, was basically sound.
The situation in Greece is different. A restructuring of the economy will be much more difficult, because it will have to be more far-reaching.
The fiscal deficit must now be redressed resulted not just from internal financial imbalances, but also from a political system that for too long time has been in denial of reality, allowing the country to live beyond its means.
Nevertheless, the European Union can neither allow Greece to slide into national bankruptcy nor hand it over to the International Monetary Fund, since other euro-zone members – namely, Portugal, Spain, and Italy – would probably be next in line to be attacked by the financial markets. In that case, the euro would be in danger of failing, for the first time seriously imperiling the entire project of European integration.
The real problem at the heart of the Greek crisis is so grave because it involves the fundamental weakness of the euro: its lack of support by a government policy.
The caps on member states’ budget deficits and public debt imposed by the Maastricht criteria have proven relatively early on to be of limited use in the real world, and the same is true for the monitoring tools linked to these limits.
In any case, the Maastricht rules were never designed for a perfect storm like the one triggered by the collapse of Lehman Brothers in September 2008.
The euro, which turned out to be the critical tool for defending European interests in this crisis, will now be subjected to an endurance test directed at the soft political heart of its construction.
Europe’s leaders – first and foremost Germany and France, which will play the deciding role – must act quickly and put through new, imaginative solutions. This will not come cheap, and therefore will entail substantial political risks. But, given a global economic environment that promises scant sustainable growth in the coming years, things could otherwise get very tough very soon.
The solutions that Europe’s leaders provide must go beyond Maastricht, but without triggering new institutional debates, which would lead us nowhere. Moreover, new instruments like Eurobonds will have to be made available in order to reduce the affected euro-zone countries’ interest burden, provided that they have taken serious steps – subject to effective control mechanisms – toward credible restructuring.
The current crisis has, however, also shown that the Council of Finance Ministers (Ecofin) is unable to assert such control over EU member states’ fiscal policies.
The direct leadership of heads of state and government is needed, at least in these times of extreme crisis.
One sign of hope is that, following the recent Franco-German summit, German Chancellor Angela Merkel for the first time did not publicly oppose the idea of a European economic government.
Spelling out such a body’s structure, costs, decision-making procedures, and control mechanisms as quickly as possible is now the order of the day. Indeed, there is no time to lose.
But even with one, two, or three steps forward, the German and French governments will be taking great political risks domestically if the euro crisis in the Mediterranean worsens and a financial bailout there becomes necessary to save the common currency.
The populations in the countries that will have to foot the bill are unprepared for the reality check ahead of them, adding fuel to a years-long growth in Euro-skepticism, which now pervades all political camps.
This applies increasingly to Germany as well, making it very likely that we will see an extremely large political problem emerge there in the near future.
Pay for the southern European countries or resign oneself to the end of the euro? The question alone makes clear what this crisis is about: the future of the European project. At the same time, muddling through – a typically European answer that limits political risk while not really changing anything – will be difficult, because the consequences of the global economic crisis have not yet been fully addressed.
What is necessary now is statesman-like leadership – and even more so stateswoman-like leadership. Angela Merkel and French President Nicolas Sarkozy are facing the defining challenge of their respective terms in office.
They must navigate the European ship safely through this storm. Only courageous thinking and action will enable them to steer clear of the rocks.
Joschka Fischer, a leading member of Germany’s Green Party for almost 20 years, was Germany’s Foreign Minister and Vice Chancellor from 1998 until 2005.
Copyright: Project Syndicate/Institute of Human Sciences, 2010.