By Michael Schuman | @MichaelSchuman | March 5, 2012 | 14
Lionel Bonaventure / AFP / Getty Images
German Federal Chancellor Angela Merkel speaks during a press conference at the end of a two-day European Union summit on March 2, 2012 at the EU headquarters in Brussels.
I have been guilty, on many occasions, of eviscerating the strategytaken by the leaders of the euro zone to combat its dangerous debt crisis. They have routinely acted too late with too little, causing contagion to spread through the zone, because they have been unwilling to put the interests of the euro over their own political careers. I have been far from alone in forwarding such a critique. Everyone from George Soros to Timothy Geithner has expressed theirconcern over Europe’s lack of action. The primary target has been German Chancellor Angela Merkel, who is really driving the entire effort. Her insistence on austerity would send Europe into a tailspin, critics contended, while her continued resistance to steps many believe would halt the crisis – such as a bigger bailout fund, or jointly issued Eurobonds – was putting the entire monetary union atrisk.
But sentiment appears to be changing. There seems to be growing optimism in Europe that the worst of the debt crisis is behind them. French President Nicolas Sarkozy was practically giddy at last week’s summit of European Union leaders. “We’re turning the page on the financial crisis,” he said at a press conference. “The strategy we’ve implemented is bearing fruit.” Now I find myself underattack. One former TIME editor is bombarding me with emails saying that my continued gloom about Europe’s future is more and more misplaced.
So is Merkel’s debt crisis strategy actually working? Have its many critics been wrong all along? Well, in my opinion, the answer depends on what we mean by “working.”
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Clearly, Merkel’s policies have brought Europeback from the brink of true disaster. Back in November, the monetary union appeared to be on the verge of unraveling, with the banking sector facing a destabilizing credit crunch, the Greek crisis intensifying, and contagion spreading to Italy. Today, the situation has greatly improved. Italy’s 10-year bond yield, which late last year soared over 7% – a rate which the country would eventually findtoo expensive to bear – has dipped under 5%, thanks to the bold reform efforts of new Prime Minister Mario Monti. Greece, after much drama, looks likely to get both a restructuring of its debt and a second, $170 billion bailout. An emergency cash-injection program by the European Central Bank has eased conditions in the banking sector. And the leaders of the euro zone have agreed to othersignificant reforms to the monetary union, including tougher rules on deficits and debt (a step towards much-needed fiscal union) and the faster introduction of a permanent bailout fund. There is also talk of other important reforms, such as steps to deepen Europe’s common market, which could help spur growth. Investors are obviously pleased. Even as the Greek bailout hung in the balance, the euro wasstrengthening — a signal that market players have begun disassociating the debt crises in the zone’s peripheral countries from the survival of the 17-nation common currency itself.
Though I will give credit where credit is due – a lot has been achieved in just the past few weeks – I’m still not prepared to hang up a “Mission Accomplished” banner just yet either. What continues to concern me is thatmost of the serious problems facing the euro zone remain unresolved. I fear investors are looking at the bandages and not noticing that the wound underneath isn’t healing.
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First of all, we have to question if the bailout programs are actually achieving what they are supposed to achieve – restoring confidence in the debt-laden economies of the euro zone. There are...