For example, in November 2011, interest rates on Italian sovereign bonds were about 8 percent all along the curve, even as the government faced refinancing needs totaling nearly 30 percent of GDP over the following year. Because debt monetization was not an option, austerity had to ensue at that point, regardless of what Merkel — or anyone else — had to say.
This suggests a collective failure by European leaders to frame the response to the crisis properly.
Southern European leaders have wasted time and energy asking Merkel for weaker fiscal medicine. Merkel and her allies have invested just as much political capital in resisting such pressure.
Meanwhile, the European Council has become a theater for tired repetition of the same old show, performed mostly for domestic audiences, with little attention devoted to the opportunity — once Italy’s political stalemate has ended and Germany’s upcoming election is over — to re-write the script.
Southern countries, still largely in denial, should accept the need for deeper, competiveness-enhancing reforms.
Germany and its allies, for their part, should accept that running high external surpluses is damaging the eurozone and themselves, and that it is time for them to put part of their huge excess savings to work to support growth. The failure of leaders in France, Italy and Spain to raise this issue more effectively has been a clear shortcoming so far.
Without a pro-growth, pro-reform deal, southern Europe’s attempts at deleveraging may result in a politically destabilizing depression.
As Mark Twain famously observed: “History doesn’t repeat itself. At best, it sometimes rhymes.”
In Europe’s case, the poetry could be very dark.
Federico Fubini is an Italian award-winning author and financial columnist.
Copyright: Project Syndicate