Margareta Pagano: Merkel needs a new back-up plan to save the euro
Sunday 23 May 2010
Damned if she does, and damned if she doesn't. You can't help but feel sympathy for Angela Merkel, the German Chancellor, as she tries to hold together the euro and her voters.
It was only a few weeks ago that Merkel was pilloried for ignoring the Greek crisis. Then, when she sought to regain the high ground by attacking the "wolf pack" speculators with her panicky ban on short-selling, she got it in the neck for trying to buck the markets. While Merkel's move to stop naked short-selling in German banks was pure gesture politics, it was financially counterproductive, inviting speculators to wonder if there was good reason to short the stocks. But it seemed to work for Merkel at home, who won the first stage of her battle by getting the Greek bailout, as well as the stabilisation package to underpin the eurozone, through parliament on Friday.
Merkel hates the bailout as much as the public does, but knew that rescuing Greece was the only thing she could do if she was to save the euro, a concept to which she is ideologically committed. But still her voters are angry, with much of the press now openly calling for Germany to pull out of the euro and go it alone.
But her latest plan to rush through new measures for better economic governance – including forcing national governments to submit their budgets to the EU – is the one that could blow up in her face. For now, it's only David Cameron who has said Britain won't sign up for such a pledge – partly because he will need a treaty change – but also because the UK is not obliged to as we are not part of the euro. Which must have been a relief for Cameron as he could do this without being branded a bad European.
It's entirely possible that other eurozone countries also won't agree to give up their budgets to Brussels. Politicians, already slashing budgets, are vulnerable at home as they ask voters to take huge cuts – in Madrid, workers are already striking against the latest austerity measures. The fear is that the public will like it even less having austerity imposed by Brussels.
In the longer term, the problem for Merkel is that neither she, nor her EU partners, are working out what to do if another country cracks like Greece. That's the real reason why the markets remain so nervous despite all the assurances. Investors know the EU's new $1trn package is only a sticking plaster on a sovereign debt crisis, which will explode if confidence continues to sink. It seems inconceivable there could be another rescue package for, say Portugal, without Europe going up in flames.
If Merkel wants to survive, she and her partners should be drawing up contingency plans for a two-tier type euro allowing ClubMed countries such as Portugal and Greece, and possibly Italy and Spain, to devalue. Such a new currency, which could be indexed to the euro, would allow these countries' economies to be competitive with their northern trade partners again, helping them solve their trade imbalances and attract investment. It's been done before and more recently, Argentina got out of its mess by devaluing and ending its fixed link with the dollar. Merkel should consider partial defeat now, rather than total defeat in a few years' time.
Women mop up: After men make a financial mess
It's clean-up time on Wall Street, and guess who's doing the washing. Serendipity or not, the top people mopping up Wall Street's biggest mess in nearly a 100 years is being handled by women. Time magazine calls them the new sheriffs. Wearing the shiny stars are Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, one of the first federal regulators to sound the alarm about the collapse three years ago; Mary Schapiro, the head of the Securities and Exchange Commission, who triggered the agency's recent lawsuit against Goldman Sachs; and Elizabeth Warren, who chairs the Troubled Asset Relief Program bank bailout and is a champion of tough new consumer-finance regulations.
And there are more female deputies in the posse. Three of the five SEC commissioners are women. And Arkansas Senator Blanche Lincoln has annoyed many with her tough new derivatives regulations, which made it into President Barack Obama's financial reforms last week. As John Wayne might have said: "Get off your horse, and drink your milk."
Cable and Willetts get to the nuts and bolts of business. Keep it up
Crikey, things really are looking up. Two politicians talking sense about real business on the same day, and, what's more, they were doing it out in the real world – factories in the provinces. First off was Vince Cable, the still-new Business Secretary, who spent Thursday at the Bentley factory in Crewe where he praised the value of engineering to the economy. As Cable rightly said, its companies such as Bentley – although owned by Germany's VW – that create the jobs which will bring growth. So let's hope the minister will improve incentives for apprenticeships as well as investment.
While Cable was in Crewe, David Willetts, our new Universities and Science minister, was out in the West Midlands also visiting apprenticeship schemes as well as speaking at Birmingham University. As you would expect of Two-Brains, his speech was an excellent analysis of the problems facing education and training and gave some clues to the shape of science to come. It was reassuring to hear Willetts – whose family worked as craftsmen in Birmingham – highlight the value technical jobs and how steering our young towards better training in those skills would be a priority. Also heartening was Willetts's point about how learning in itself brings happiness and fulfilment, whether it be academic or physical. He's clearly been reading Matthew Crawford's book, The Case for Working with Your Hands, which took the US by storm last year and is now having an impact here.
Perhaps the most challenging issue for all of us – parents, employers and government – is improving the advice given at schools to avoid situations like the one Willetts raised of the young female inventor of a solar-powered fridge who didn't study engineering after being badly advised about A-levels. Having more physicists teaching physics would be a start; only a fifth of teachers have degrees in the subject.
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