The conquering of the euro crisis seems like something out of a fairy tale. Faced with a gut-wrenching peril, our hero closes his eyes and chants an incantation: "Whatever it takes!" Suddenly, once-insurmountable troubles melt away and everyone lives happily ever after.
So what happened? Was it all in our minds? Was the episode anything more than a panicked bunch of bond traders, stampeding toward a precipice but now safely pacified and redirected?
As last summer turned into fall, Italy and Spain were wobbling. The two countries -- the third and fourth largest economies in the eurozone -- saw their bonds shunned by global investors. For the heavily indebted pair, a bond sell-off meant that interest rates rose and disaster loomed. At some point, the high price of borrowing would become unbearable. The eurozone nations had gathered funds to try to avert a crisis, but the sum would not be enough to cover the needs of such large member economies.
Then Mario Draghi, head of the European Central Bank, stepped in to save the day. He announced that the ECB would do whatever it took to save the currency. If extra funds were needed, the ECB would provide them through a program it called Outright Monetary Transactions -- the unlimited purchase of troubled nation bonds once those countries asked for help.
The effect of his announcement was dramatic. Bond yields fell as buyers relaxed. While the previous bailout fund might have been limited, the ECB's ability to print money and buy bonds was not. The restoration of calm was so successful that the ECB did not have to actually do a thing -- the mere announcement that it was willing to act relieved the pressure on Spanish and Italian borrowing.
It is hardly a novel idea to think that a dangerous market panic could be settled by words alone, so long as those words were credible and uttered by the right person. So, do we mark this up as an instance of judicious intervention? A daring move by Mario Draghi that saved the European project and merited his selection as the Financial Times' Person of the Year?
Maybe. The problem is that the sovereign debt problems plaguing Spain and Italy were only one part of a multi-dimensional crisis. The other problems remain, two in particular. First, the untenable contradictions of the eurozone's approach to banking have not been resolved. Second, the beleaguered countries along the eurozone's periphery are being asked to endure potentially unbearable levels of unemployment and economic stagnation.
The banking problem can seem the most obscure part of the problem. Yet as the global financial crisis demonstrated, the provision of credit is the lifeblood of an economy. Cut off credit and economic asphyxiation sets in quickly. Europe's additional discovery was that, in a single currency zone, money could flow very rapidly from any bank perceived as risky to others perceived as safe. Any hint that a bank's host country might leave the euro or that the bank might have gorged itself on dubious sovereign debt would be enough to start the exodus of funds. No funds, no credit, no economic activity.
Eurozone leaders resolved to fix this with a banking union. And then they ran into politics. Banking regulation is sensitive. There was little appetite for ceding control. Last week, discussing a recent bilateral move by France and Germany to coordinate their banking policies, the Financial Times' Wolfgang Münchau wrote:
"My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks ... The most important signal sent by the unilateral legislation in France and Germany is the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures ... The renationalisation of banking means that the monetary union is as unsustainable today as it was in July last year -- and now the policies needed to fix this problem have been abandoned."
This was one danger of Draghi's move. By alleviating the sense of impending doom, he also may have undermined the impetus for overcoming entrenched opposition to reform.
The growth and unemployment situation is not much better. A story this week, contrasting positive Spanish sentiment with dismal performance, detailed the economic turmoil in the country:
"...in the last quarter of 2012 ... the number of companies declared bankrupt soared by almost 40 per cent to 2,584. It was the highest number since the crisis began, suggesting that the situation for credit-starved Spanish companies is not only getting worse -- but getting worse faster than before ... Nor has there been any sign of a turnround in Spain's dismal unemployment numbers, which continue to rise towards 6 million, or more than 26 per cent of the workforce ... The IMF expects a drop in GDP of 1.5 per cent this year -- a worse recession than in 2012."
We also come upon another danger of Draghi's move: By restoring confidence in the euro, he paved the way for the currency to rise, which did no favors for eurozone exporters. That's hardly the cause of Spanish economic woes, but it is no help, either.
And then, as always, the democracies of Europe have politics. Spain's governing party is caught up in a political scandal. Italy is moving back to electoral politics after a technocratic interlude. It is not clear that difficult political choices will get much easier in either case.
The list of eurozone perils is alarmingly long. Yet a remarkable sense of calm prevails in the markets. Perhaps this will be a crowd-pleasing story book ending, the sort in which impossible obstacles are overcome and everyone goes home happy. Or perhaps it will be the kind of story one rarely sees out of Hollywood, in which our blissful hero opens his eyes, only to find that he had dreamt his salvation and the threats remained, more menacing than before.
DANIEL ROLAND/AFP/Getty Images
Pope Benedict XVI's surprise renunciation of the Chair of St. Peter generated a tsunami of commentary usually reserved for events such as a presidential election or a Super Bowl. The pope's struggles with scandal dominated most stories, some of which noted that while these scandals were not of his own makings, they created an enormous burden for him.
The announcement has been greeted with dismay, resigned sadness, and hope in the pope's admirers, Catholic and not. David Goldman, a.k.a. Spengler, wrote, "As the shepherd of the founding institution of the West, Benedict personally embodied its best traditions. He is one of the last men living to have assimilated the fullness of European culture, a member of the ‘heroic generation' of Catholic theologians that included Henri de Lubac and Hans Urs von Balthasar."
The analysis of Benedict's papacy will roll on in the run-up to the conclave that will select his successor, and long beyond. The world's fascination with this office suggests that a pope plays many roles with influence beyond the Roman Catholic Church.
One such role is diplomat. The Holy See is an international personality of long standing, recognized since the middle ages. (The State of the Vatican City is a more recent entity, established in the 1929 Lateran treaties to resolve the status of the pope and his former territories in Italy). The Holy See has its own diplomatic corps, formal relations with 179 countries (including the U.S. since the Reagan years), observer status at the UN, and it is to the Holy See and its head of state, the pope, that arriving ambassadors present their credentials.
Pope Benedict played this role effectively. Although some of his early trips were disturbed by awkward moments with the press, he learned. His 2008 visit to the United States, with stops in Washington and New York, was especially successful and was one of several encounters that cultivated a real friendship with President George W. Bush.
World leaders are eager to visit the pope. Certainly some of that eagerness is deference to Catholic constituencies at home. And, as probably the world's biggest distributor of aid to the poor in every land, the Church has a hand in human development that gives it shared interests with both donor and recipient countries.
In other cases, the substance of the meetings is more geo-political, as the Church deals with the persecution and plight of Christians in China, the Middle East, Pakistan, and elsewhere; faces concerns about encroachments on religious liberty in the United States and Europe; pursues unity within Christianity, including especially with the Orthodox Churches; and generally seeks the space to continue its ministries and activities. The story of Cold War cooperation between President Ronald Reagan, Pope John Paul II, and Prime Minister Margaret Thatcher is well told in John O'Sullivan's book, The President, The Pope, and the Prime Minister.
The Obama administration would be well served to consider all of this as it nominates a new ambassador to the Holy See, who will be received by a new pope.
But diplomat was not the role most cherished by Benedict. He was first a priest, second an intellectual force and phenomenally prolific theologian. He is one of the few people anywhere capable of debating, and changing the views of, a philosopher like Jurgen Habermas and co-authoring books with leading non-believing politicians such as Marcello Pera, former president of the Italian senate. Then a young priest, Benedict was a major influence in the Second Vatican Council and has spent much of his papacy clarifying the correct interpretation of that Council's teaching. He has constantly emphasized the vital complementarity of faith and reason to overcome fundamentalist extremism and secular nihilism.
Perhaps Benedict's most important legacy will be his writing during his papacy: his three volumes on the life of Jesus, his encyclical letters (especially Caritas in Veritate, or Love in Truth, and Spe Salvi, Saved in Hope) and his regular homilies.
The betting has begun -- literally and figuratively -- on who will replace Benedict. The pope must be priest, teacher, diplomat, administrator, and reformer of a Church still recovering from self-induced tragedy and mismanagement, an arbiter of conservative and liberal viewpoints, authoritative yet gentle. As George Weigel writes in his recent book, Evangelical Catholicism: Deep Reform in the 21st Century Church, no sane person wants the job, much like the American presidency.
And as we look around us these days, those of us who are Catholics might recall the traditional prayer cited this week by David Warren: "Lord, do not send us the pope we deserve."
Carsten Koall/Getty Images
As I wrote in a recent op-ed for the New York Times, calls for direct talks with Iran have been on the rise, in large part due to the lack of movement in talks between Iran and the P5+1, which includes the United States, the United Kingdon, France, Germany, Russia, and China. The P5+1 is entering its eighth year of discussions with Tehran, yet has made little progress toward a nuclear agreement while Iran has vastly expanded its nuclear capacity. This raises a question I do not address in the op-ed -- is there a continued role for the P5+1?
For diplomats, large international coalitions hold an irresistible allure, especially when dealing with troublesome regimes. Acting in concert through groupings such as the P5+1 improves international compliance with sanctions and reinforces the target state's isolation, in theory amplifying the pressure upon it and enhancing the prospects for achieving the coalition's objectives.
Such a broad grouping has downsides, however. First, coordination -- whether on carrots or sticks - takes time, and lots of it. A host of factors, from each state's domestic politics to unrelated international disputes among the members, prevents quick resolution of differences.
Second, the states all have different interests at stake. The United States sees Iran as a broad threat, given its support for terrorism and its destabilizing activities in the Middle East, which is only magnified by Tehran's pursuit of nuclear weapons. Russia and China see the issue differently. Tehran may target restaurants in Washington, but it avoids entangling itself in Chechnya and Xinjiang. As a result, many in Moscow and Beijing see Iran not as a threat, but as a potential (if difficult) partner in constraining Washington's exercise of power and influence in the region.
The result of these varying interests is a lowest-common-denominator approach, whereby the group focuses on the one thing that they can all agree upon. In this case, that is Iran's compliance with the international nonproliferation rules, which all of the major powers would like to see preserved. Any agreement the P5+1 reaches is likely to focus narrowly on Iran's nuclear capabilities; other issues of interest to the United States and the European Union -- whether Iran's regional activities or human rights record -- are left to be pursued by separate, ad hoc coalitions of likeminded countries outside the official negotiations.
Given these downsides and the plodding pace of the negotiations, it is little wonder that calls for direct U.S.-Iran talks are on the rise. But the dismissal of such talks by Iran's supreme leader and the long and unsuccessful history of U.S.-Iran contacts suggest bilateral talks would not prove any more of a silver bullet than multilateral ones have been. The US offer of direct talks with Iran is likely to make more of an impression on our coalition partners -- convincing them that we are going the extra mile on diplomacy and hopefully pushing them to do the same on pressure -- than on the Iranian regime.
Indeed, while we should not hesitate to employ diplomacy creatively and flexibly in service of our policy aims, Iranian truculence likely ensures that the P5+1 will remain the most meaningful forum for talks on Iran's nuclear program. Tehran appears to see compromise as more dangerous than maintaining its confrontational stance toward neighbors and the West; Iran's leaders must be persuaded that in fact failing to compromise is the greater danger. Doing so will require various forms of international pressure -- diplomatic, economic, and military -- which must be marshaled through multilateral diplomacy. As I note in the Times piece, a broader U.S.-Iran breakthrough, if it occurs, is more likely to be a consequence of a strategic shift by Iran than a cause of one.
Mohammed Ameen - Pool/Getty Images
Now that summer is upon us, the global economic problems are no less serious, but perhaps our blogging can be. This is summertime, when one just wants to roll down the car windows, crank up some classic songs on the iPod, and sing along.
The pressure on Germany to fix Europe's looming problems is something I've addressed before, more seriously. The ever-louder pleading for Chancellor Merkel to just do it already, though, has lately put me in mind of other sorts of importunings. So, with apologies to Billy Joel, herewith a reworking of his 1977 classic, "Only the Good Die Young" (redone as "Stopping the PIIGS Bank Run"):
Come on, Angela, don't make me wait/ You Protestant countries start much too late/ Ah but sooner or later it comes down to fate/ You know what must be done/ When they sold you the euro and took the Deutsche Mark away/ They promised restraint and said we'd converge some day/ Ah but they never told you the price that you'd pay/ Now that Bankia's come undone
Stopping the PIIGS bank run/ That's what I said/ Stopping the PIIGS bank run
You might have heard we run with a dangerous crowd/ Private investors just can't be found/ Our national budgets often tend to run aground/ Ah but that never hurt no one
So come on Angela show me a sign/ Send up a signal I'll throw you a line/ Those old time treaties you're hiding behind/ Just won't get it done
Darlin stopping the PIIGS bank run/ I tell you stopping the PIIGS bank run/ Stopping the PIIGS bank run
You get a fiscal treaty/ And more input as a consolation/ You'll set a brand new goal/ And no risk of an export hole/ But Angela they didn't give you/ Quite enough information/ You didn't count on Greece/ When you were counting on low debt/GDP
And they say there's political union for those who will wait/ Some say it's better though there may be a taint/ But wouldn't you rather laugh with the sinners/ Than cry with the saints?/ The sinners are much more fun
You know you've got to stop the PIIGS bank run/ I tell you stopping the PIIGS bank run now/ You've got to stop the PIIGS bank run
You said your voters told you/ All they worried about was inflation/ They worry about subsidies/ Transfers that continue endlessly
Come on, come on, come on Angela/ Don't make me wait/ You Protestant countries start much too late/ Sooner or later it comes down to fate/ You might as well get it done/ You've got to stop the PIIGS bank run/ Tell you baby/ You've got to stop the PIIGS bank run
Imagine this with an interwoven saxophone and you should be all set for summer crooning on the autobahn. Of course, from a policy standpoint, Chancellor Merkel should probably have some of the same concerns about giving in that the apocryphal Virginia would have had in the Billy Joel original.
Watching Greeks fire-bomb their banks, shut down their airports and ruin the tourist trade that is their economy's main prospect, I can't help but hear Virgil reprised. In that Roman poet's great narrative The Aeneid, survivors of the Trojan War seek a place to start anew, after much difficulty founding what will become the Roman Empire. It's rough going, and after much hard luck and stormy seas, the Trojan women burn the ships in order to prevent the men returning them all to sea.
They knew the Sybil (a rough approximation to an oracle for the Greeks) had prophesied that when they "quit at last of the sea's dangers / for whom still greater are in store on land... wars, vicious wars / I see ahead, and Tiber foaming in blood." Seeing the fleet in flames, Ascanius' reaction is "but your own hopes are what you burn!" And so it is with the Greeks -- they burn their own hopes by such unwillingness to do the unpleasant but necessary belt tightening.
Tourism provides one in five jobs in the Greek economy and a full sixteen percent of its gross domestic product. Being tied to location, it cannot be manufactured elsewhere. Being tied to history and culture, it is inherently Greek. And the best way to attenuate the effects of the austere cutbacks in government spending necessitated by Greece's financial crisis is to grow their economy as fast as possible. The debt to GDP ratio goes down both by reducing the numerator and increasing the denominator. Yet the Greek riots against the austerity program are sure to diminish tourism.
It is difficult not to sympathize with German hesitation to bail Greece out. Germany has labored for nearly 20 years to bring the former East Germany up to par with the West. Greece leapt into the euro on questionable accounting and proceeded to splash around the cheap credit that German stolidity in finances extended to the rest of the eurozone. One in three Greeks is a government employee. Hairdressers can retire at age 50 with full pensions because their jobs are categorized as hazardous.
But now much more outrageous is that than our Foreign Service Officer's Union refusing rewarding diplomats that serve in war zones? When Secretary Rice tried to give preferential promotion to diplomats that volunteered for service in Iraq or Afghanistan, the union representatives argued that every posting is dangerous -- as though volunteering to serve in Iraq took no more courage than volunteering to serve in Costa Rica. Currently two-thirds of foreign postings are designated as hazardous duty posts.
The state of our public finances is not as bad as Greece's, but we'll get there fast. Current and future obligations already incurred by our government amount to 500% of our GDP. And President Obama's budget will triple our already staggering national debt by 2020.
What may -- may -- save America from Greece's fate is that public outrage is building at our government spending money we don't have. When California governor Arnold Schwarzenegger tried to move against public sector unions in 2005, voters rejected his ballot initiatives. Californians cannot yet bring themselves to make the hard choices Greece is now having imposed on it by the IMF and its EU allies. New Jersey governor Chris Christie seems more successful, perhaps aided by greater public awareness of the parlous state of government finances. The hold of "entitlements" and public sector unions over government finances needs to be broken -- otherwise we really will be Greece.
Markets will not bankroll U.S. profligacy forever. No one can say when the chill will start, but once it does -- as Greece's example demonstrates -- the effects are dramatic. The longer we stall before facing up to the unpleasant reductions we must make, the more draconian will be the demands. As the spiraling cost of reassuring markets of the EU's commitment to support Greece demonstrates, it's much better to beat markets to the reckoning.
Here again Virgil offers sound advice. As the Sybil gives Aeneas instructions to Hades, she cautions:
The way downward is easy from Averinus.
Black Dis' door stands open night and day.
But to retrace your steps to heaven's air,
There is the trouble, there is the toil.
It's easy to become Greece. But it's very hard to get out of their predicament.
LOUISA GOULIAMAKI/AFP/Getty Images
Europe's financial difficulties were predictable, but they have been unfolding at a startling clip. This has brought out different reactions in different commentators. Paul Krugman, for example, is preparing to hide under a table. I am no less impressed by the potential for disaster, but I am also struck by the undemocratic nature of major deliberations in Europe and by parallels here in the United States.
"Far too much time has been wasted on inaction," said Angel Gurría, secretary-general of the Paris-based Organisation for Economic Co-operation and Development. "We should have intervened two or three months ago. The markets have developed negatively since then, unnecessarily. That's why we have to act now, quickly and decisively."
The North Rhine-Westphalia election has the potential to upset the existing balance of power. At stake is not only the state legislature, but also control for Mrs. Merkel's coalition over the little-watched upper house of Parliament, the Bundesrat, which has to sign off on legislation. Billions of dollars in assistance for Greece may not play well with voters in a state with its own financial problems.
"May not play well" is an understatement. A German poll found that only 16 percent of Germans support a Greek bailout while 65 percent are opposed. I am not an advocate of governing by referendum (a number of years living in California clarified the problems with that approach). Yet the avoidance of the electorate on such matters is deeply problematic.
LOUISA GOULIAMAKI/AFP/Getty Images
By Phil Levy
Wherever else the status quo ante may reign, the Obama administration has brought change to the tradition of sending foreign dignitaries home with lovely parting gifts. Back in September, the chairman of China's legislature was dispatched with a new set of tire tariffs. Now, German Chancellor Angela Merkel has been sent home with an auto jobs program that won't start.
This latest gesture flows from the U.S. government's majority ownership stake in General Motors. GM is a global company and its empire includes ownership in a European subsidiary, Opel. Half of Opel's 50,000 employees are in Germany. Thus, when GM was facing bankruptcy this spring, the German government took a strong interest. It offered a $2.2 billion loan to help Opel survive and preserve German jobs.
The Obama administration guided GM through bankruptcy and on to a distinctive ownership structure. U.S. taxpayers now hold a 61 percent stake in GM, with an additional 17.5 percent stake granted to the United Auto Workers. The bankruptcy process concluded in early July, at which point GM set about trying to become lean and mean. One aspect of that was a move to sell Opel to a Russian-backed Canadian group called Magna.
What does any of this auto arcana have to do with foreign policy? Aren't these just the obscure fiddlings from the back of the business pages? Well, consider the level at which this has been handled in foreign governments. In August, when GM was still pondering whether to sell Opel to Magna:
German Chancellor Angela Merkel expressed her regret at General Motors' failure to choose a buyer for its German unit Opel, and said that a decision was 'urgently' needed for the carmaker's future.
German Foreign Minister Frank-Walter Steinmeier was on the phone with his U.S. counterpart and reported, "Secretary Clinton said she would communicate the German government's position within the U.S. administration."
That sounds a lot like a foreign policy issue. There's more. After announcing its decision to sell Opel to Magna in September, GM's board reversed itself yesterday. Here was some of the commentary from abroad:
General Motors' behavior toward workers is completely unacceptable," German Economy Minister Rainer Bruederle told reporters the morning after GM's shock news, adding: "General Motors' behavior toward Germany is completely unacceptable."
In Moscow, Russian Prime Minister Vladimir Putin hinted the battle for carmaker Opel was not over..."
President Obama has made clear that he never aspired to run a car company and would like to get out of the auto business. But the administration is in the same position as an absentee landlord of a rundown property -- responsible, like it or not. The promises that GM would be run in a hands-off, all-business fashion have not been credible either to members of Congress or leaders abroad. (This is not the only uncomfortable aspect of GM's awkward ownership structure; GM's minority owners, the UAW, recently refused to cut costs for GM's private-sector competitor, Ford. Imagine.)
If the administration is truly eager not to run a car company, it could always divest. Sen. Lamar Alexander (R-TN) put forward a plan to do just that in July. It was voted down in the Senate, with leading Democrats explaining that the time was not right. That raises the question of just what the administration is waiting for. Unless the government plans further infusions of cash into GM, or plans to intervene in GM's decision-making, what benefit could there be to holding on to the company and inviting unwelcome domestic and foreign pressures?
One possibility is that the government is better able to predict GM's worth than the market. Perhaps the administration's financial seers believe they can time the recent run-up in stock market prices and ride it further with their $60 billion bet on GM. Alternatively, the divestment delay may just serve to hide the ultimate cost of the administration's auto intervention.
Whatever the reason, the entanglements deepen. The administration has been asked to provide further billions for GMAC, a key financier of car purchases (formerly known as General Motors Acceptance Corporation). Overseas, the Chinese have launched an investigation of U.S. auto subsidies (the pot calling the kettle red?).
And we still have the issue of German Opel angst. Perhaps this is why President Obama declined Chancellor Merkel's invitation to travel to Germany to celebrate the anniversary of the Cold War's End. Maybe he was worried about what she'd give him in return.
Bundesregierung/Steffen Kugler-Pool/Getty Images
Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.