Merkel and Sarkozy Lose Eurozone Magic

by John M. Curtis
(310) 204-8700

Copyright December 6, 2011
All Rights Reserved.                                         

               Showing their latest PR move to rescue the Eurozone, German Chancellor Angela Merkel and French President Nicolas Sarkozy tried to reassure roiled markets that they were close to resolving Europe’s sovereign debt problems.  With nearly half the Eurozone countries facing bankruptcy, needing bailouts and unable to meet debt obligations, the dynamic duo put the best face on an implacable situation:  The one-size-fits-all currency called the euro doesn’t work.  Launched in 1999 promising unparalleled prosperity, the euro has actually driven ordinarily solvent nations into defaults.  While Greece is only the most well-known case, larger economies like Spain and Italy now can’t meet current domestic and foreign debts.  U.S. stock markets have been in a sideways roller coaster since the Eurozone crisis hit last month, unsure how to price the crisis into the market.

            Merkel and Sarkozy have pushed for draconic penalties in the Eurozone’s constitution to punish violators for running budget deficits.  Locking in penalties on Eurozone violators does nothing to deal with the fatal flaw of the Eurozone common currency:  There’s no common tax base from which to spread the wealth among the Euirozone’s many disparate economies.  Writing new penalties into the Eurozone’s constitution only makes matters worse, giving less flexibility to already desperate economies.  Eurozone’s 17 participating members remained up in the air heading into a Dec. 8-9 economic summit designed to reassure stock markets around the globe that Europe has its act together.  Making matters worse, Standard & Poors threatened to downgrade Eurozone credit should the sovereign debt problems not be resolved expeditiously.

            Imposing stiff penalties on Eurozone members won’t convince the Frankfurt-based European Central Bank to print more euros and spread the debt-burden across all the Eurozone.  Bond sales in Italy, Spain and Portugal haven’t generated enough capital to solve sovereign debt obligations.  Eurozone participants look to the ECB to print more cash and bailout Eurozones’ struggling economies.  Merkel and Sarkozy want to fast-track the European Stability Mechanism fund to provide and economic safety net to Eurozone’s struggling economies.  Calling the efforts “a good start to the week of truth,” ING economist Carsten Brzeksi in Brussels urged ECB Presdient Mario Draghi to step up his response to the Eurozone crisis.  Brezki believes that all of Merkel and Sarkozy’s actions are designed to win concessions from the ECB to help with Eurozone bailouts and future financing.

             Sarkozy sees the clock ticking down on the Eurozone, calling for prompt ECB action.  “We don’t have time . . . we are conscious of the gravity of the situation,” said Sarkozy at the Elysee palace in Paris.  Neither Germany nor France have the capital to bailout the Eurozone’s struggling economies without creating internal strife and undue sacrifice among German and French citizens.  “From a financial market perspective, it’s about them doing enough to deliver Draghi’s fiscal compact,” said Brzeksi, urging Germany and France to put more pressure on the ECB to solve the Eurozone’s debt problems.  Getting draconic austerity agreements from Eurozone members still doesn’t fix the problem of how the common currency helps Eurozone countries resolve their debt problems.  Imposing stringent rules won’t reverse the social welfare and pension benefits that have broken the Euozone.

            ECB’s Draghi wants a fiscal compact among Eurozone members on acceptable levels of debt and the plan to reduce the whopping pension and welfare benefits that leave the countries cash-strapped.  “It’s a step in the right direction for the ECB but we’ll want to know how the automatic sanctions are triggered,” said Klaus Baader, co-chief economist at Societe Generale SA in Paris, questioning how more penalties fix the Eurozone’s debt problems.  “When France and Germany have joint press conferences and say we agree on everything you have to take that with a pinch of salt,” said Baader, telling the cold truth about the Euozone debt crisis:  Slick public relations doesn’t fix the problem with a one-size-fits-all currency, that supposed to apply equally well to Germany as it does for Greece.  Everyone knows that the euro’s inflated value has not worked for Eurozone’s poorer economies.

            Eurozone leaders know that they can’t sell Eurozone bonds to generate enough capital to make member states solvent.  Merkel and Sarkozy have practically stood on their heads begging the ECB to print enough cash to cover the mounting debts that threaten the survival of the euro.  Neither the U.S. nor Asia, nor any place in-between, want to contemplate the global repercussions to ending the euro.  While markets would eventually recover, just the thought has sent global stock markets into a roller coaster in recent weeks.  “We are steadfastly determined to make the decision at the council now,” said Merkel, trying to calm world financial markets.  More happy talk by Merkel and Sarkozy doesn’t change the inescapable fact that the euro doesn’t work for Eurozone’s struggling countries.  If the ECB fails to print cash quickly, the euro will become part of Jurassic Park.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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