Remember how Europe had defied all the doomsayers and staved off both the collapse of its single currency and a wider political crack-up? Well, it is becoming increasingly clear that stop-gap measures enacted by the European Central Bank in 2012, with the support of German Chancellor Angela Merkel, succeeded in buying time and not much else. It’s true that the continent’s most heavily indebted governments — Spain, Italy, Portugal, Greece and Ireland — can still fund themselves, thanks to implicit ECB backing. But none of them has managed to rekindle much growth, and even Germany’s economy went into reverse during the second quarter of 2014. Increasingly, the talk is of deflationary risks and long-term stagnation like that which has afflicted Japan for the past quarter-century.
The United States and the United Kingdom, which have practiced a more expansive monetary and, in the case of Washington, fiscal policy, have outperformed the 18-nation euro zone since the Great Recession. Citing this experience, Obama administration officials have tried to cajole the Europeans — especially Merkel — to adopt more monetary and fiscal stimulus, only to be rebuffed. Berlin calls the shots in European economic affairs based on its superior financial wherewithal, and it remains deeply committed to budget-balancing.
To be sure, the Germans are not denying any and all support to other nations. Germany ultimately stands behind the ECB’s guarantees, and it has provided a growing market for producers in the rest of the eurozone; its trade surplus with those countries has fallen by more than half since 2007. Still, at 2 percent of German gross domestic product, that surplus remains far too high. Nor is Berlin necessarily wrong to insist its neighbors enact structural reforms in return for more financial help; that’s a political necessity for Merkel’s government, whose taxpayers are loath to bail others out, and an economic necessity for debtor countries, if they are to use resources efficiently. The problem, though, is that even if those reforms were enacted today, they might take years to yield results, and Europe’s biggest economies may not have that long to wait.
Italy has just slipped into its third recession since 2008. Its government debt is projected to reach 135 percent this year. This has occurred despite the advent of a reform-minded government under Prime Minister Matteo Renzi, a 39-year-old who says he’s committed to restoring Italy’s competitiveness through tax cuts and deregulation — though he has yet to make much headway on either. He has been able to deliver only a modest tax rebate for low-income workers, which raises debt in the short run, and he has dissipated much political energy trying to reform Italy’s Senate. The cost of Renzi’s promised economic overhaul is $100 billion; spending cuts alone can’t pay for it. Probably only the ECB, through U.S.-style quantitative easing, could rescue Italy in the short run. Yet Mario Draghi, the Italian chief of the ECB, insists that Italy’s performance “has nothing to do with monetary policy,” as he put it Aug. 7.
No doubt the pace of reform in Rome is disappointing. Yet as they pressure Renzi to do more, Draghi and Merkel should remember that his government, flawed as it is, represents Italy’s best hope.