The weather in Davos has offered a perfect setting for this year’s World Economic Forum. Heavy snowfall has made simply keeping your footing a difficult challenge; one ill-timed misstep on the ice could easily send you head first into a snow drift. After the first day’s discussions, the business leaders and economists debating inside the town’s convention center seem to feel the same about the state of the world economy. One wrong move and we could find ourselves tumbling into something ugly. No one is walking on thinner ice than the leaders of the euro zone. With the debt crisis at the beginning of its third year, Europe still represents the most dangerous threat to global economic stability.
And the delegates here seem to be slipping into two camps about what might happen to the common currency this year. The Europe-has-it-all-together team claims that the leaders of the euro zone are taking the steps necessary for stabilizing the 17-nation euro – fiscal and structural reform in the weaker economies, liquidity support to avert defaults and banking failures, and the beginnings of long-term measures to stiffen the backbone of the union. Then there’s the we’re-still-heading-into-the-toilet group, which maintains the position that Europe continues to muddle through, pursuing expedient measures that are not tackling the underlying problems facing the euro zone, and, worse still, sending the region into a deadly death spiral. Which view proves correct could determine what happens to the global economy in 2012.
The division was made crystal clear in two presentations: one by German Chancellor Angela Merkel, the other by outspoken financier George Soros. It would be impossible to find two more diametrically opposed views on the future of Europe’s great experiment in monetary union.
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In a rambling speech, Merkel, as you’d expect, defended the German-led euro zone strategy for tackling the debt crisis. Fiscal reform was making progress, she said, the resources were in place to back up debt-ridden economies, and most of all, Europeans stand together in their commitment to the common currency. Tougher rules on public finances, and tougher methods of enforcing them, were on the way. There is a new focus on stimulating growth and creating jobs. These things take time, she said, and pleaded for patience. Europe, she made clear, would not let its monetary union fail. In fact, Europeans are ready for even “more Europe” – further steps towards deeper integration. “I’m absolutely convinced that we will be able to master this crisis,” she said.
In a sharp counterpoint to Merkel’s confidence, Soros earlier in the day unleashed a doom-and-gloom assessment of Merkel’s debt-crisis policy, and Europe’s faltering economies. German insistence on harsh austerity measures “will push Europe into a deflationary debt spiral,” in which sinking growth makes stabilizing debt levels more difficult. European leaders, fearful of committing financial resources to shore up the monetary union, continue to take too little action too late. With borrowing costs for the debt-ridden nations still high, euro zone policies relegate them “to the status of third world countries.” Rather than bringing Europe together, the euro is tearing Europe apart. Merkel’s strategy “will generate both economic and political tensions that could destroy the European Union.”
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Can we get two more divergent views? The sad truth is that Merkel offered no new ideas in her Davos address, leaving the crowd somewhat disappointed. Much of what she said we’ve all heard before, and none of it has done much to bolster confidence in the euro or Europe. Soros may be an alarmist – maybe purposely so, to shake Europe’s leaders from their continued delusions – but he’s spot on in arguing that a euro zone where a large chunk of its people are condemned to declining living standards and feeble economic prospects is not a viable one.
In the end, the debate between Merkel and Soros makes the failings of the German Chancellor’s approach to the crisis perfectly clear. Her debt-crisis strategy has supposedly been designed to boost the confidence of investors like Soros. Obviously it hasn’t. And until it does, the threat to euro won’t go away.