Germany’s Blindness

It’s too easy to blame Spain for the storm that hit the markets this week—let's not forget that Greece used to be blamed until yesterday. It’s too easy to point the finger against ruthless, obtuse speculators that “disregard Spain’s reform efforts,” as the spokesman of Germany’s Treasury Ministry said yesterday.

It’s too easy to blame only one country for the mistakes of 17 member states. Since the euro is a single currency shared by several countries, it carries collective rights and duties. That’s true only on paper. The 2010 Greek crisis, instead of closing the ranks, deepened the divide between center and periphery, the North and South and the rich and the poor.

The reason the markets are targeting Europe is that the EU is not strong enough. The markets test the cohesiveness of the EU by targeting Greece, Portugal, Ireland, Spain, Italy and even France and usually find Europe unprepared. Whenever the EU responds to an attack, it’s either too late or not effective. This way, speculators not only are not stopped but are even encouraged to keep targeting the euro zone.

There are no signs that the self-inflicted massacre that started two years ago will stop anytime soon, even if the game is becoming increasingly dangerous for everybody. German Chancellor Angela Merkel thought she could fix the euro crisis by imposing austerity measures and reforms on the most debt-ridden countries. She was wrong. In order to overcome the crisis, European countries need growth, while austerity measures only produce recession and social tensions, at least in the short term. Since the financial markets know this well, it’s no surprise that Spain’s spreads went up right after Prime Minister Mariano Rajoy announced cuts of 10 billion euros in the health and education sectors. The recent cuts will reduce the Spanish deficit by 5.3 percent in 2012. The markets are reacting in a similar way to Mario Monti’s austerity measures, since they believe that austerity is useless without growth and does not contribute to modernization or stability.

With the recession getting worse, austerity is not likely to convince the markets. Without a truly European strategy, the ECB can play only a limited role, as was clear with its recent liquidity injection. The ECB’s intervention did not help the economy; it only allowed banks to buy government bonds, thus decreasing interest rates, including in Italy and Spain. These banks are now in distress because they hold too many toxic bonds.

No matter how we look at it, the EU’s recovery plan, with its mix of distraction and irritation, seems at a dead end.

In France, Nicolas Sarkozy is too busy trying to defeat his rival, François Hollande, who disapproves of austerity measures. The pro-growth coalition made of Italy and the U.K. seems to have disappeared. Merkel, on the other hand, hopes to last until the 2013 election without having to ask for more funds from the German parliament, while at the same time planning to impose more austerity measures on debt-ridden countries and possibly exploiting their vulnerabilities.

Her move is very risky. The fact that yesterday the markets showed little enthusiasm for Germany’s latest 10-year bonds, which were sold at a record-low average yield, is a sign that investors are starting to have doubts about the effectiveness of unilateral austerity. Another point to keep in mind is that the 17 EU partners are on the same boat, a fact that Germany's leader does not seem to acknowledge, thus imposing on other countries sacrifices that are ultimately useless.