It says a lot about the dramatic crisis facing the euro zone when the leaders of its two biggest economies go into a highly scrutinized summit amid promises, assurances, and even a form of hype stressing that nothing much will come from it. But that’s precisely the buzz surrounding this afternoon’s Paris meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy, whose advisers sought to undercut rising expectations that a major response to the euro’s critical debt situation might be in the offing by saying no new measures will result from the pow-wow. But if the prediction was an honest forecast of what’s to come, it also showed the limits of reverse psychology: the move to prevent European markets from plummeting when their inflated hopes for the meeting are not fulfilled led those same markets to react to the depressing warning by opening down Tuesday—and staying that way.
Being told there’d be nothing neat-o issuing from the late Tuesday meeting wasn’t the only reason markets had for bumming. Earlier in the day, new statistics showed the German economy grew just 0.1% in the second quarter of the year, compared to the expected 0.5%—and way off 1.3% growth in Q1. That word of Europe’s largest and economic stumble came after numbers released Friday showed France—Europe’s number two engine—was flat in the second quarter after a nearly 1% advance the previous period. Those figures reflected a larger slowing of the euro zone economy to just 0.2%, confirming fears that the growing debt pressure agonizing the 17-nation bloc wouldn’t be easing anytime soon.
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And as Sarkozy and Merkel’s aides made clear, the debt crunch isn’t going to let up under the effects of any headline-generating innovations conjured up following their Tuesday talks, either. The reason: the kind of truly monumental break-through needed to ease market fears of possible default in the most indebted euro zone economies isn’t going to happen until leaders—starting with Sarkozy and Merkel—decide to remedy the main weaknesses that have hampered the common currency since its inception: integration and coordinating economic management. So-called “economic government” has never been created to oversee the money all members use. In euro-land, everyone likes the idea of living in the same up-market gated community, but no one wants the collective codes that would prevent them from propping their favorite eye-sore clunkers on cinder blocks on their lawn when they feel like it.
“In order to impose the systemic reforms and remedies on national economies required to harmonize and stabilize the euro zone, you’d need the kind of central coordination, collective engagements, and binding rules for everyone that sovereignty-minded national politicians don’t like to relinquish to European organizations,” says Karel Lannoo, CEO of the Brussels-based Center for European Policy Studies think-tank. “The problem is we created a single financial and monetary zone without harmonizing the ways we finance and manage our economies. That’s let every capital do what’s in its own best interests regardless on the consequences for the euro. And to a certain degree, the Germans and French are doing that now as the Greeks and Portuguese did back when they were building up such huge debt.”
Lannoo is referring to the refusal by Paris and Berlin to embrace the creation of euro bonds as a means of attaining some breathing space for the hardest-hit euro economies by basically pooling the zone’s strengths to overcome the worst of its vulnerabilities. That would involve larger, more stable economies like Germany, the Netherlands, France and others to back up Greek, Irish, and Spanish debt with a common euro bond—and thereby take pressure off the most over-leveraged nations that markets are betting against (and in so doing, raising the costs of borrowing funds those countries need to stave off default). The problem with that is few people in stronger euro economies are keen on assuming responsibility for partners who spent themselves into trouble—especially after those former nations have already committed billions in funds to help prop the later ones through the crisis.
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Most hostile to the euro bond idea has been Germany—which has always been more disciplined than its currency partners—though France and other relatively solid nations aren’t exactly hot for the idea either. Despite the gravity of the situation now threatening the very existence of the euro, Merkel and most Germans voters are particularly averse to hitching their sound national economic wagon to the creaking carts elsewhere in the euro zone. Instead, she—like Sarkozy—appear intent on relying on the recently created, €400 billion European Financial Stability Facility to help debt-crippled countries through the crisis, then come up with the kind of periodic gestures intended to calm markets that are likely to arise in the wake of Tuesday’s meeting.
But Lannoo thinks that continued resistance to collective integration like euro bonds—and the reliance upon rolling responses to market attacks on the worst-hit countries in the zone–not only takes the euro back to its founding weakness. He says it also shows national leaders still deluding themselves into thinking they can save the currency without taking the painful integration steps likely to resolve the current crisis. He warns that the desire to simply restore a business-as-usual atmosphere within the euro zone is probably impossible until member states bite the bullet and fuse and change the ways they do business.
“We all appreciate the fact that Germany doesn’t want to see the interest it now pays on debt rise as it will if it ties itself to other countries via euro bonds, but the reality is—and despite the attempts to ignore it–everyone is just going to have to accept and embrace both the advantages and disadvantages of using the euro together if it’s going to work as a common money,” Lannoo says. “It isn’t all a negative one-way street. The German economy has benefited enormously from the euro, and owes a lot of its recent growth to the trading it does with its euro partners. The way out of this crisis is through more, better integration—not by everyone continuing to select between the good and bad they’re willing to accept. That should be clearer now than ever before.”
If it is, don’t expect either Merkel or Sarkozy to let on they’ve come to that conclusion when their summit of under-achievement breaks up this evening—and sets the table for another one just like it some time further down the debt crisis line.
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