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Merkel May Have Rescued the Eurozone

Might Frau Nein's tough love debt limits translate into the U.S. needing German discipline?

Germany Chancellor Angela Merkel made progress last week toward a long-term rescue of the euro, along with other EU leaders, by imposing some discipline on wobbling European economies that may need German help in the future to keep them from defaulting on sovereign debt. "Merkel," Bloomberg reported on Friday, "is turning Europe's sovereign-debt crisis into an opportunity to reshape the euro region in Germany's image."

For years she's been known as "Frau Nein," at least to English-speaking journalists. Lately she's uttered consistent refusals to promise German money for new, direct eurozone bailouts, like the controversial aid to Greece last year. She's demanded more fiscal restraint from heavily indebted European countries like Ireland and Spain.

Now she seems to have won. Conditions agreed to by other EU members (like higher retirement ages and spending cuts) have allowed her to throw full German support behind a long-term plan to shore up the currency. In a recent interview with Stern magazine, she said Germany would "do everything necessary to guarantee a stable euro," and — more importantly — she dispelled the creeping notion of a two-speed euro, a currency split more or less between the economies of northern and southern Europe.

"Not on my watch," she told Stern, without departing from her tabloid image. "On behalf of Germany I say a clear 'no.'"

None of this is pretty, but one linchpin for controlling the euro crisis is debt control. Merkel thinks of the "constitutional debt limits adopted by Germany in 2009 as a model for the rest of Europe," according to Bloomberg. And debt limits are a hot topic now in America. The dollar's been undermined in recent years, no less than the euro, by oceans of public debt, and the new Republicans in Congress have sworn to resist what might otherwise be a routine move this year to raise the federal debt ceiling.

EUROPEAN DISPATCHMichael Scott Moore complements his standing feature in Miller-McCune magazine with frequent posts on the policy challenges and solutions popping up on the other side of the pond.

Michael Scott Moore complements his standing feature in Miller-McCune magazine with frequent posts on the policy challenges and solutions popping up on the other side of the pond.

The Treasury (according to Tim Geithner) needs the good graces of Congress to keep from defaulting on part of a debt load that's preparing to cross the current legal limit of $14.3 trillion. Tea Party types have said nein.

"This is where the line in the sand ought to be drawn," U.S. Rep. Ron Paul told Fox News in January. "Don't raise the debt, and we would have to get our house in order."

In principle, of course, he's right: It's not good to owe so much money. But America doesn't play by the same rules as the eurozone. The indebted Europeans now being pressured to act more like Germans wouldn't have changed their ways before the euro existed, and no one would have blinked, because the traditional solution for countries like Italy, Spain, Portugal and Greece was to print money and inflate their way out of a crisis.

That's what the U.S. is doing now. It's not a proud position to be in. But Washington can maintain it, temporarily, if only because the dollar is still the world's major reserve currency.

Not that the budget shouldn't be reined in. But a sudden freeze on U.S. debt limits would roil bond markets, ding Uncle Sam's credit rating and raise the cost of U.S. government borrowing — raising, in effect, the national debt. A vote on the ceiling also occurs as a routine move in approving a U.S. budget. It's a formality and an anachronism unique to American politics, which grandstanding politicians can use when they want to make a point. (See the disastrous near-shutdown of the federal government by Republicans led by Newt Gingrich in the '90s.)

Financier Bill Gross, who manages Pimco Total Return Fund — a major customer for U.S. public bonds — has said the debt-ceiling debate horrifies him. "Obviously, I'm all for a move to a balanced budget over time. But this is like imposing the death penalty for shoplifting," he told The Associated Press in January. "The signal it gives to countries that hold Treasury [bills] is that their assets are hostage to a rogue Congress. It's unacceptable."

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