European Debt Crisis

A German tea party with a French pastry

David Brancaccio Dec 7, 2011

German Chancellor Angela Merkel and French President Nicolas Sarkozy — “Merkozy” for short — laid out their plan in an open letter to European Council President Herman Van Rompuy today. The plan calls for stricter budget controls for eurozone nations and comes before the regions leaders meet again tomorrow evening and Friday.

Many market players seem skeptical that the summit will get as much done as advertised. While the French finance minister says he wouldn’t leave until an agreement is reached, a senior unnamed German official said he was “pessimistic” about the leaders ability to reach a overall deal.

Matthias Matthijs is a professor of political economy at both the Johns Hopkins and American Universities. He says the “Merkozy” proposal is essentially a German tea party with a French pastry. The German tea is austerity. The French pastry is the money or “bazooka” the European Central Bank could inject to stabilize the crisis. In the end, a tea party whose substance is largely austerity isn’t going to be much fun (or work).

Matthijs says there’s a myth dominating here, one that says markets just want austerity and cut, cut, cut. He says they also want to see future growth. On the European trade balance sheet, Germany is running a surplus and the Mediterranean countries are in deficit. But just cutting everybody’s budgets will lead Europe into a new depression. That needs to be addressed at this upcoming summit.

The big question this weekend will be whether European leaders can move far enough ahead for the European Central Bank to justify moving in and shoring up the region’s weakest economies.

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