A “Merkel Plan” for Europe

Financial Mirror (Cyprus) - - FRONT PAGE -

Ever since Europe’s eco­nomic cri­sis erupted more than four years ago, politi­cians and pun­dits have clam­oured for a grand so­lu­tion, of­ten in­vok­ing the ex­am­ple of Amer­ica’s post­war Mar­shall Plan, which, start­ing in 1948, helped to re­build Western Europe’s shat­tered, debt-rid­den economies. But the po­lit­i­cal mo­ment has never been ripe. That could be about to change.

Europe’s sit­u­a­tion to­day bears some sim­i­lar­i­ties to the 1940s. Bur­dened by the pub­lic debts re­sult­ing from past mis­takes, eu­ro­zone gov­ern­ments know what they need to do but not how to do it. They mis­trust each other too much to col­lab­o­rate. Mean­while, de­mand in most of the Euro­pean Union is weak, rul­ing out the eco­nomic growth needed to re­pay debts and of­fer hope to the 25 mln un­em­ployed.

Parochial sus­pi­cion has been the main ob­sta­cle to a grand so­lu­tion. No coun­try’s tax­pay­ers have wanted to feel that they are pay­ing for oth­ers’ ex­cesses: the sin­gle cur­rency did not im­pose shared re­spon­si­bil­ity. So cred­i­tor coun­tries, led by Ger­many, have sought to do the min­i­mum nec­es­sary to keep the euro alive, while debtors have grum­bled im­po­tently about Ger­many’s in­sis­tence on fis­cal aus­ter­ity.

The two sides dis­agree about the na­ture of the Euro­pean sick­ness, and when there is no agree­ment on the di­ag­no­sis, it is hard to agree on a cure. Yet a con­ver­gence may be at hand, owing to de­vel­op­ments in Greek, Span­ish and Bri­tish pol­i­tics, as well as to the sim­ple pas­sage of time.

Greeks look poised to elect on Jan­uary 25 a gov­ern­ment dom­i­nated by the far-left Syriza party, which once stood for re­pu­di­a­tion of the euro but now pledges to ne­go­ti­ate a re­struc­tur­ing of Greece’s debts. Spain’s most popular party ahead of the gen­eral elec­tion due at the end of this year is Pode­mos, which was founded only in Jan­uary 2014 and has views sim­i­lar to Syriza’s. And the United King­dom’s elec­tion in May will rock the Euro­pean boat by fo­cus­ing on the ques­tion of when Bri­tain should hold a ref­er­en­dum on whether to leave the EU.

Th­ese po­lit­i­cal rum­bles worry cred­i­tor coun­tries, which is re­flected in the fre­quency of warn­ings from Ger­many that any new Greek gov­ern­ment must ad­here to ex­ist­ing agree­ments. That is a sure in­di­ca­tor that Ger­many fears that Syriza will not do so. The bar­gain­ing has be­gun.

The pas­sage of time ought to help with this bar­gain­ing. Ger­many’s for­mula for the euro cri­sis has been to in­sist on fis­cal belt­tight­en­ing and struc­tural re­forms to re­duce fu­ture pub­lic spend­ing on pen­sions and wages, make labour mar­kets more flex­i­ble, and boost pro­duc­tiv­ity, all in re­turn for emer­gency loans. Since the cri­sis be­gan, the main re­cip­i­ents – Greece, Ire­land, Spain, and Por­tu­gal – have been fol­low­ing that for­mula.

As a re­sult, it is be­com­ing pos­si­ble, in po­lit­i­cal terms, to say that the debtors have taken their pun­ish­ment and have made their economies more com­pet­i­tive.

Eco­nomic growth has re­bounded strongly in Ire­land, mildly in Spain and Por­tu­gal, and mea­gerly in Greece. What is now hold­ing back th­ese and other Euro­pean economies is weak de­mand in the eu­ro­zone as a whole.

That is why a mod­ern ver­sion of the Mar­shall Plan is needed. Po­lit­i­cally, it would be smart if Ger­man Chan­cel­lor An­gela Merkel were to take the ini­tia­tive in propos­ing such a grand so­lu­tion, rather than be­ing forced into piece­meal, re­luc­tant con­ces­sions by new gov­ern­ments in Greece, Spain, or else­where.

It would be even smarter to share that ini­tia­tive with the lead­ers of Europe’s other big economies: French Pres­i­dent Fran­cois Hol­lande, who, fol­low­ing the ter­ror­ist at­tacks ear­lier this month, is per­haps es­pe­cially re­cep­tive to ef­forts to pro­mote unity and eco­nomic growth, and Bri­tish Prime Min­is­ter David Cameron, who wel­come signs of Euro­pean re­form.

A mod­ern Mar­shall Plan should have three main com­po­nents. First, sov­er­eign debt in the eu­ro­zone would be re­struc­tured to ease the pain suf­fered by Greece and Spain. Sec­ond, a col­lec­tively fi­nanced pub­licin­vest­ment pro­gramme would fo­cus on en­ergy and other in­fra­struc­ture. Third, a timetable for the com­ple­tion of sin­gle­mar­ket lib­er­al­is­ing re­forms – no­tably for ser­vice in­dus­tries and the dig­i­tal econ­omy – would be es­tab­lished.

In Ger­many, debt re­struc­tur­ing would be the most con­tro­ver­sial com­po­nent. But Ger­mans should be re­minded that, along with Mar­shall Plan funds for Western Europe, the other big boost to Ger­many’s post­war eco­nomic re­cov­ery came from debt re­struc­tur­ing. The London Agree­ment of 1953 can­celed 50% of Ger­many’s pub­lic debt and re­struc­tured the other half to give the coun­try much longer to re­pay.

Though a write-off of eu­ro­zone debts would be po­lit­i­cally dif­fi­cult, it would be pos­si­ble to re­fi­nance a large pro­por­tion with longer ma­tu­rity Eurobonds, which all eu­ro­zone coun­tries would un­der­write. What

would is cru­cial is that such a rem­edy is ex­tended to all eu­ro­zone mem­bers, rather than sin­gling out one coun­try (Greece).

By in­clud­ing the other com­po­nents of pub­lic in­vest­ment and sin­gle-mar­ket com­ple­tion, the Merkel Plan (or, bet­ter, the Merkel-Hol­lande-Cameron Plan) would be able to restart eco­nomic growth while open­ing coun­tries to more trade and greater com­pe­ti­tion.

This ad­dresses one of the prin­ci­pal Bri­tish com­plaints about the EU: that it has so far failed to com­plete the sin­gle mar­ket, a project partly ini­ti­ated by Mar­garet Thatcher in the 1980s.

Of course, a mod­ern Mar­shall Plan would face a wall of skep­ti­cism and ob­struc­tion by na­tional in­ter­est groups. But, by stand­ing to­gether, Euro­pean of­fi­cials could win that bat­tle. And if it is not tried, to­mor­row’s Euro­peans may never for­give to­day’s lead­ers.

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