Weekend Economists Chart the Bradbury Chronicles, June 8-10,2012

[Demeter]

39. The Euro’s 11th Hour By Steven Rattner

WAKE ME WHEN WE GET TO MIDNIGHT....

http://www.nytimes.com/2012/06/09/opinion/the-euros-11th-hour.html

WITH each passing day, the noose around the neck of the euro zone grows tighter, with no indication that European leaders share any coherent vision for avoiding the hangman. Instead of tackling structural problems, much of the endless chatter about the common currency centers on financial engineering: rescue funds, backstopping banks, printing money and the like.

At the heart of the European quandary is the conundrum that ideas that are economically sensible are not politically feasible, while ideas that are politically possible make little economic sense. Topping the “must do” list is the need to fix the disastrous design flaw in which the 17 members agreed to a common monetary policy without coordinating their budgets and regulations. A consequence was broadly divergent competitiveness. Since 2000, wages of German workers have increased barely more than efficiency has grown, an enormous advantage in global markets. Meanwhile, Greece’s unit labor cost (the average cost of labor per unit of output) has increased by roughly 40 percent. Greece is merely the most disobedient of a passel of problem children; by this all-important measure, the other 15 members are mostly sprinkled closer to Greece than to Germany. Without the ability to adjust exchange rates, euro zone countries with rising labor costs can’t compete against export powerhouses like Germany. But fully integrating 17 economies and undertaking the necessary restructuring remains, not surprisingly, politically absurd, with Europe’s clock clicking down.

Frustrated, European leaders have descended into the five stages of grief: denial, anger, bargaining, depression and — by some — acceptance that the euro could fall apart. They have embraced ideas that simply won’t do the job. Consider the simplistic headline-grabbing debate between growth (greater deficits) and austerity (smaller deficits)...



Meanwhile, all roads lead to Berlin. Ironically, a currency created in part to curb Germany’s influence following reunification is now effectively under German control. Chancellor Angela Merkel has been caricatured as the leader of the austerity campaign, although the measures that she is demanding of others — like wage restraint and greater labor-market flexibility — mirror those Germany adopted over a decade ago...In essence, she (like the voters of Greece) is playing a huge game of chicken. She wants the weaker countries (including even France) to clean house before loosening German purse strings. If that happens, Germany would be well advised to back short-term financial rescue actions similar to those the United States undertook in 2008. And the stronger countries must also accept the need for fiscal transfers — subsidies to poorer euro zone members — just as states like New York pay far more in federal taxes than they get back in services and transfer payments.

The euro zone may find another piecemeal solution and escape the hangman for now, but unless it attacks its more fundamental problems, it is doomed to a cascading series of crises that will ultimately destroy the common currency.

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Steven Rattner, a contributing opinion writer, is a longtime Wall Street executive and a former counselor to the Treasury secretary.