HURRICANE TINA::

The Thatcherite road is all Europe has left: Solving the eurozone crisis will take more liberalisation than Germany wants to swallow (Bill Emmott , 5/20/10, Times of London)

The trouble is that it remains wholly unclear what the long-term solution will be. The immediate consequence of May 9 is that Greece, Spain, Portugal and Italy have had to announce or start preparing budget cuts. That austerity in an already weak eurozone recovery adds to doubts about the sustainability of European growth. The longer-term consequence, say Germany, France and the European Commission, will be much stricter rules on budget deficits, with more intrusive surveillance of each other’s fiscal policies. But how, and with what punishments for breaking the rules?

Presumably, if Greece, Spain or any other country could not obey these rules the ultimate penalty would have to be expulsion from the euro. But Mrs Merkel has already described any exit from the currency as unthinkable.

Odd though it may sound, last Saturday at a conference in Bahrain I heard one German version of what that would imply. Steffen Kampeter, the No 2 in the German Finance Ministry, said that what would have to happen is a strictly enforced fiscal union, combined with a broad liberalisation of goods, services and labour markets. In other words, if monetary policy is in the hands of the European Central Bank, and there is no fiscal room for manoeuvre, the eurozone had better deregulate and turn Thatcherite. He is right. No other answer is on offer to the question of how the eurozone will restore growth and get itself out from under its debts.

You may well ask if Spain, Italy or Greece will accept that medicine. But you should also ask if Germany will either. After all, it is Germany that in recent years has blocked full liberalisation of services trade and a common energy policy.

So there are tough decisions ahead, and some tough arguments about them, amid more euro-crises. With little prospect of growth, investors can be forgiven for being sceptical about whether the Southern Europeans can emerge from their debts without a Latin American-style restructuring — and Mrs Merkel’s comments about “orderly state insolvency” have only fed that scepticism. Should that restructuring take place, there would have to be more write-offs by European banks, most of which have not yet had the sort of rigorous clean-up that has been done in America. This, rather than any rapid exit from the euro for Greece or Spain is the likely shape of the next euro-crisis.

None of this is good for Britain; this weak, deflating European economy is our main export market. If this debt crisis were to end up turning Europe Thatcherite, that would be something for us to celebrate. But that is, shall we say, a step or 12 ahead.

Mrs. Thatcher and neoliberalism in general have come off rather well from the "crisis of capitalism" that was supposed to be their death knell.

Posted by Orrin Judd at May 19, 2010 4:22 PM