15 November 2011

Martin Wolf: Europe must not allow Rome to burn

In his FT column, Wolf observes that what is at stake today is not only the stability of the European – perhaps the world's – economy, but the survival of the most successful – and certainly most civilised – effort to unite Europe since the fall of the western Roman empire 1,535 years ago.

The dream of reunification never died. It was apparent in the claims of popes and “holy Roman emperors”. It was carried by Napoleon’s eagles. It is the aspiration embedded in the European Union.

So, when Germany’s Angela Merkel, chancellor of Europe’s most powerful state, calls “for Europe to build a ‘political union’ to underpin the euro and help the continent emerge from its ‘toughest hour since the second world war’”, I take her seriously. I have little doubt, too, that the majority of the German business and political elite believes that the survival of the euro and of a united Europe is in the country’s interest. The question is whether they are prepared to pay the price.

My interpretation of the actions of chancellor Merkel is that “just enough, just in time” is itself the strategy. In this way, she may hope, the German people will come round to doing more. In this way, too, she may expect, peripheral members will be brought into line. She will not allow things to get so bad that the eurozone collapses; but she will not give so much money that the backsliders slacken their efforts.

Just enough, just in time has been too little too late. What was once a crisis in small peripheral countries has become a conflagration. Spreads on sovereign credit have reached the stratosphere. Worse, sovereign spreads now include some risk of a break-up.

Mr Monti is going to need a great deal of luck. He is also going to need an enormous amount of help, of three kinds: first, at least backstop financing for the rollover of sovereign debt, to the tune of nearly €1,000 billion ($1,400 billion); second, profitable and dynamic external markets; and, finally, a credible strengthening of the political underpinnings of the union, sufficient to make a break-up inconceivable. All of these are going to depend on bold German decisions. They are also going to depend on the ECB. If it allows slow growth, let alone an outright recession, to grip the eurozone, the chances for big peripheral members are grim. Italy is not little Ireland. That should be obvious to everybody.

The eurozone has fiddled until Rome itself started to burn. With the new government, it has what may turn out to be a last chance to put out the fire. Yes, it is conceivable that Italy would remain in the eurozone even after a default. But that cannot be likely. In any case, an Italian default would batter bond markets across the continent and banks across the world. The time for too little too late has passed. What is needed, instead, is “too much, right now”. Power brings responsibility. Germany alone has the power. It is up to it to exercise the responsibility.

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