The Corner

European Leaders Gather in the Swamp

Traditionally, heads of state gather at a “summit” projecting the desired image: a meeting of the highest of the highs, discussing lofty subjects in the thinnest of airs.

However, if truth in labeling applied, 2012’s first meeting of European leaders would be dubbed a swampfest. Europe is trapped in a deepening economic and political swamp, with no clean exit in sight.

The Greetalytugal swamp (Gree[ce] — [I]taly — [Por]tugal) stretches from the Aegean Sea to the Atlantic coast. Greece, the cradle of western civilization, is also the cradle of the crisis that began in November 2009 when we first learned the Greek government had lied about its budget deficits. Trust is the currency of finance, and trust was broken.

Just how badly was made clear last weekend when the German finance minister Wolfgang Schauble suggested Greece may not get another bailout unless it can demonstrate control over its finances. Of course, without a bailout, Greece will default, and if Greece defaults, then a breakup of the Euro is likely soon to follow.

To ensure Greece sticks to a crushing austerity plan, Germany suggested Greece should accept a eurozone budget overseer, effectively and officially putting Greek public finances under eurozone control.

Germany’s demands are, from a creditor’s perspective, quite reasonable. German taxpayers are asked to bail out Greece and others, again and again. They should expect, nay demand, Greece mend its ways so it needs no more bailouts and will someday repay. Though reasonable to Germans, such demands are wholly unacceptable to Greeks or any other sovereign people.

To ask such a thing now is a sign of German frustration, the exhaustion of Teutonic patience. But it is also a tacit admission that the only way out of this part of the swamp is to end the Eurozone fantasy. Indeed, it may be a ploy to ensure the blame for failure falls on Athens, not Berlin.  

Next in line geographically is Italy. Italy received a temporary reprieve with the elevation of Eurocrat extraordinaire Mario Monti as prime minister. But Italy is following the Grecian formula, and high debt and deficits’ leading to austerity, leading to higher taxes, leading to deeper recession is hardly a formula for clawing one’s way out of the swamp. Italy’s reprieve will likely end once the latest Greek chapter closes.

And then there is Portugal. This headline from the Daily Telegraph says it all: “Portugal to need debt haircut as economy dips into Grecian downward spiral.” The market has already judged Portugal’s debt unsustainable as five-year government notes from Lisbon now pay about 19 percent. Portugal or Italy, next? That is the question.

The great fear is that, if any fall, a financial contagion will sweep other nations — and perhaps the rest of Europe — with it. But the fact is, Europe already experienced a substantial contagion years ago. What’s bubbling up now are the consequences of a contagion of bad economic policies based on unaffordable social-safety nets, high taxes, stifling regulation, and an intense desire for a monetary union without the necessary trappings.

However this plays out in Greece, the rest of the swamp may be next. If Greece succumbs to German demands, can Italy and Portugal be far behind? Will German (and Germany is by no means alone) frustration lead to implacable demands for further transfers of sovereign authority? Germany may be backing away from its demands, but this idea once planted will not just go away. It’s not called a swamp for nothing.

J.D. Foster is the the Heritage Foundation’s Norman B. Ture Senior Fellow in the Economics of Fiscal Policy.

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