Working with Economic Policy Differences: Seeking a Transatlantic Solution to the Euro Crisis

September 6, 2012

On Thursday, September 6, 2012, Dr. Tim H. Stuchtey, Executive Director of the Brandenburg Institute for Society and Security (BIGS), and Alexander Privitera, Director of the AGI Business & Economics Program, hosted a roundtable discussion regarding long-term causes for the euro crisis and recent events for its solution.  Earlier that day, the European Central Bank’s (ECB) President Mario Draghi announced that it would buy secondary bonds from the peripheral states of the euro zone.  This policy is largely considered to give policy-makers some time for the necessary reforms to save the euro.  Referred to as the “big bazooka,” this monetary policy initiative ensures that the ECB has unlimited rescuing capabilities to bail out struggling economies within the euro zone.

In order for a member state to receive assistance from the ECB, “conditionality” must be satisfied.  In other words, countries must request a bail out, and temporarily share fiscal sovereignty with Brussels based EU Institutions. This reflects demands made by the German government.  Both speakers stressed the importance of further structural reforms to accompany fiscal integration within the euro zone.  Without such reforms the currency area will remain too heterogeneous and continue to face significant turmoil. If political leaders won’t enact such reforms, both speakers believed that Thursday’s monetary policy announcement will only benefit Europe in the short term.

With regard to Germany’s reception of the announcement, both commentators highlighted several important facts.  While Merkel officially supports Draghi and this broad-sweeping monetary policy effort, support within Germany may be waning.  In particular the Bundesbank and its president Jens Weidmann benefit from their reputation as the guardian of price stability and thereby private wealth. On September 12, the German Constitutional Court will rule on the constitutionality of Germany’s participation in the funding of the European Stability Mechanism (ESM).  Furthermore, domestic political players are pressuring Merkel to denounce Draghi’s monetary measures, which are believed to be at the expense of the German taxpayer.  Further structural reforms within the euro zone remain important.  For instance, the requirement for states accepting bail-outs to also promote austerity, which is supported by Merkel, seems to be working in countries such as Ireland and Spain.  Ireland currently has a current account surplus and Spain is slowly moving towards the goal of reducing its budget deficit to 3% of GDP.

Both speakers agreed upon the importance of Thursday’s ECB announcement as a major step toward recovery within the euro zone.  However, while both speakers wanted the euro to survive past the near future, Tim Stuchtey put more emphasis on the need for structural reforms and a strengthening of ordoliberal principals while Alexander Privitera underlined the need for much greater fiscal and political integration backed by strong financial solidarity.