Europe’s situation today bears some similarities to the 1940s. Burdened by the public debts resulting from past mistakes, eurozone governments know what they need to do but not how to do it. They mistrust each other too much to collaborate. Meanwhile, demand in most of the European Union is weak, ruling out the economic growth needed to repay debts and offer hope to the 25 million unemployed.
Parochial suspicion has been the main obstacle to a grand solution. No country’s taxpayers have wanted to feel that they are paying for others’ excesses: the single currency did not impose shared responsibility. So creditor countries, led by Germany, have sought to do the minimum necessary to keep the euro alive, while debtors have grumbled impotently about Germany’s insistence on fiscal austerity.
The two sides disagree about the nature of the European sickness, and when there is no agreement on the diagnosis, it is hard to agree on a cure. Yet a convergence may be at hand, owing to developments in Greek, Spanish, and British politics, as well as to the simple passage of time.
Politically, it would be smart if German chancellor Angela Merkel were to take the initiative in proposing a grand solution
Greeks look poised to elect on January 25 a government dominated by the far-left Syriza party, which once stood for repudiation of the euro but now pledges to negotiate a restructuring of Greece’s debts. Spain’s most popular party ahead of the general election due at the end of this year is Podemos, which was founded only in January 2014 and has views similar to Syriza’s. And the United Kingdom’s election in May will rock the European boat by focusing on the question of when Britain should hold a referendum on whether to leave the EU.
These political rumbles worry creditor countries, which is reflected in the frequency of warnings from Germany that any new Greek government must adhere to existing agreements. That is a sure indicator that Germany fears that Syriza will not do so. The bargaining has begun.
The passage of time ought to help with this bargaining. Germany’s formula for the euro crisis has been to insist on fiscal belt-tightening and structural reforms to reduce future public spending on pensions and wages, make labor markets more flexible, and boost productivity, all in return for emergency loans. Since the crisis began, the main recipients – Greece, Ireland, Spain, and Portugal – have been following that formula.
As a result, it is becoming possible, in political terms, to say that the debtors have taken their punishment and have made their economies more competitive. Economic growth has rebounded strongly in Ireland, mildly in Spain and Portugal, and meagerly in Greece. What is now holding back these and other European economies is weak demand in the eurozone as a whole.
That is why a modern version of the Marshall Plan is needed. Politically, it would be smart if German chancellor Angela Merkel were to take the initiative in proposing such a grand solution, rather than being forced into piecemeal, reluctant concessions by new governments in Greece, Spain, or elsewhere.
It would be even smarter to share that initiative with the leaders of Europe’s other big economies: French president François Hollande, who, following the terrorist attacks earlier this month, is perhaps especially receptive to efforts to promote unity and economic growth, and British prime minister David Cameron, who would welcome signs of European reform.
A modern Marshall Plan should have three main components. First, sovereign debt in the eurozone would be restructured to ease the pain suffered by Greece and Spain. Second, a collectively financed public-investment program would focus on energy and other infrastructure. Third, a timetable for the completion of single-market liberalising reforms – notably for service industries and the digital economy – would be established.
In Germany, debt restructuring would be the most controversial component. But Germans should be reminded that, along with Marshall Plan funds for Western Europe, the other big boost to Germany’s postwar economic recovery came from debt restructuring. The London Agreement of 1953 canceled 50% of Germany’s public debt and restructured the other half to give the country much longer to repay.
Though a write-off of eurozone debts would be politically difficult, it would be possible to refinance a large proportion with longer maturity Eurobonds, which all eurozone countries would underwrite. What is crucial is that such a remedy is extended to all eurozone members, rather than singling out one country (Greece).
By including the other components of public investment and single-market completion, the Merkel Plan (or, better, the Merkel-Hollande-Cameron Plan) would be able to restart economic growth while opening countries to more trade and greater competition. This addresses one of the principal British complaints about the EU: that it has so far failed to complete the single market, a project partly initiated by Margaret Thatcher in the 1980s.
Of course, a modern Marshall Plan would face a wall of skepticism and obstruction by national interest groups. But, by standing together, European officials could win that battle. And if it is not tried, tomorrow’s Europeans may never forgive today’s leaders.
Bill Emmott, a former editor of The Economist, is executive producer of The Great European Disaster Movie, to be broadcast by the BBC on February 8 and Arte shortly thereafter
Copyright: Project Syndicate, 2015