The making of Merkel's euro

The Greek elections have and will change little. What matters is how Angela Merkel reconciles her commitment to austerity with some sort of short-term transitional plan to break the political deadlock.

In the aftermath of the Greek election, all eyes are on Athens to see if conservative New Democracy and socialist PASOK can successfully form a coalition. The election has distracted, for a day or two at least, from the real issue at hand – the need for a plan of action for the single currency.

What we need to do is turn our attention away from Greece and toward Berlin and Brussels. The fact is, the Greek election hasn’t really changed anything. The eurozone is in the same situation it was last week, just slightly calmer about the possibility of a Greek exit.

Markets in Europe and US were mixed following the election result, reflecting that investors are deeply concerned about the lack of action taken to save the euro.

Aside from developments in Greece, the situation in the rest of the eurozone has deteriorated rapidly in recent weeks. The disastrous Spanish bailout is the latest example highlighting the incompetence of EU officials, and will hopefully serve as the impetus needed to force eurozone countries to reconsider their inept solutions.

Overnight, yields on Spanish 10-year bonds rose to a euro-era high of 7.18 per cent. At this unsustainable rate, we may well see Prime Minister Mariano Rajoy go to Brussels cap in hand to ask for another bailout – if he can bear to say the term "bailout” that is. Yields on Italian bonds also rose overnight, as the contagion continues to spread from Spain.

The problem is that bailouts no longer have the desired effect of stabilising the markets. This is due in part to the fact that there would simply not be enough funding to rescue both Italy and Spain if both countries needed full-blown bailouts.

Initially, bailouts were viewed in a positive light because they were seen as a short-term temporary solution. As Portugal, Ireland and Greece received their rescue packages, investors waited in vain for the long-term solution that never came.

We have now arrived at a pivotal point, in which the future of the currency hinges on the decisions made in the coming weeks and months. It’s time for Europe to decide on the future of the euro. If they get it wrong this time, we may well see the breakup of the single currency.

As has become the norm during times of crises in the EU, we must look to German Chancellor Angela Merkel. Whether Europe likes it or not, Merkel holds the fate of the eurozone in her hands.

In the face of rising criticism for her austerity-only policies, Merkel has steadfastly refused to concede on a number of proposals from neighbouring countries. While she rejects calls for a banking union without a political union, the euro house of cards is dangerously close to toppling over.

As leaders squabble over the benefits of a banking union, a political union, or a fiscal union, they are failing to provide adequate responses in the near or medium-term. Most of the options that are being argued in Berlin and Brussels will take years to put into place.

Berlin needs to understand that investor confidence is pivotal for the future of the currency. A new direction is needed to pacify investors, and perhaps it’s time for Merkel to give weight to another’s opinion.

As the relationship between Germany and France has cooled, French President Francois Hollande’s views on growth have gained traction in the bloc. With the crisis worsening, Hollande’s calls for more to be done to stimulate growth have given the eurozone new hope.

As outsiders give their two cents and call on Europe to reconsider the strict austerity measures currently imposed, Merkel must surely be feeling under pressure. Prime Minister Julia Gillard made her position clear ahead of the G20 summit in Mexico, saying that the answer to global economic problems would not be found through austerity, but through realistic programs.

Gillard joins a long list of leaders calling for growth measures in the region, as it becomes evident that the ongoing problems in Europe will continue to have an impact on the global stage.

Merkel needs to accept that the stringent austerity measures imposed on struggling nations cannot continue, and will only serve to further divide an already fractured Europe.

After four years of crisis, and little action taken, it’s time for Merkel to reconsider her options. We need a decisive short-term plan for the bloc that will address immediate concerns, followed by an attainable long-term plan that results in deeper integration of the union.

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