Global Markets Move, but Merkel Won't

The Wall Street Journal

Never say that euro-zone countries can't agree on anything. A consensus is rapidly forming: Germany should transfer to its euroland partners more of its hard-earned money, either by lending its impeccable credit to an issue of euro bonds, or contributing more to a much-enlarged European Financial Stability Facility.

This weekend, Belgium's finance minister, Didier Reynders, added his voice to the crowd demanding access to Germany's wealth. No surprise there: Belgium ranks third, right behind Greece and Italy, in the size of its debt relative to the size of its economy. True, it has a way to go before its almost 100% debt: GDP ratio catches up to Greece's (about 150%) and Italy's (about 120%), but its 10-year bonds now yield approximately twice the premium over German bunds that investors extract from France, and Moody's Analytics steadily upgrades the probability of a Belgium default.

I perhaps should mention that the emerging consensus concerning Germany's role as euro zone Lady Bountiful does not include the lady herself: Chancellor Angela Merkel is having none of it.

If anything is clear after last week's meeting with French President Nicolas Sarkozy it is that the Lady is not for turning from her mission to prevent the wastrel nations of the euro zone from feasting on the productivity and hard work of her voters. Their appetite for handouts whetted by the snacks Ms. Merkel has so far put before them, Greece, Italy, Spain and Portugal would like another helping, and such as Belgium want their share of the goodies.

But there are some things to which Ms. Merkel did agree. One is that more meetings are needed en route to much tighter integration, a goal of the proponents of the "European Project' from day one. There will be twice-yearly meetings of the heads of state of the euro area, to be known as the Economic Government, with former Belgian prime minister and now president of the European Council Herman van Rompuy, in the chair. If German money is to be spread more widely around the euro zone, so will German discipline, apparently with Mr. Van Rompuy wielding the rod. For Mr. Sarkozy this, and Ms. Merkel's agreement to "harmonize" the taxes of Germany with those of France, is another step down the road to the cartel of governments that Mr. Sarkozy has always sought.

Another product of the minisummit is that a financial transactions tax is to provide a new source of revenue for the euro zone and, watch for it, the European Union as a whole, which is why the European Parliament, hungry for a new source of revenue to support its ever-rising budgets, is so enthusiastic a supporter.

With Britain the dominant player in financial services, the fact that such a tax would damage that sector as traders fled to other markets, some public, some private, is of little concern to the tax-loving eurocracy. Never mind that shortly after Sweden introduced such a tax in the 1990s the flight of transactions from its markets was so great that the Swedish authorities repealed the levy. Or that the International Monetary Fund last year pointed out that an FTT would reduce liquidity and raise the cost of capital. Wall Streeters are cheering Ms. Merkel and Mr. Sarkozy on, on the dual assumptions that transactions will flee the EU and head to, among other places, America, and that Republicans in Congress can restrain President Barack Obama from responding to his inner European by following suit.

Most important, Ms. Merkel agrees with her French partner that more control over the finances of individual nations is needed if Germanic discipline is to be introduced to, or forced upon (depending on your point of view) fun-loving members of Club Med. It is no surprise that the idea of limiting deficits to 3% of GDP, and debt to 60% of GDP is appealing. After all, those were enshrined in the Maastricht Treaty as part of the deal that saw Germany surrender the deutschemark in return for a pledge that the EU would never become a transfer union, draining its wealth. Both Germany and France ignored those constraints when they became too binding.

France, with a deficit running around 7% of GDP and debt equal to almost 82% of its GDP, is unembarrassed demanding not only that these limits be met but that all nations adopt balanced-budget amendments. This is a testimonial to Mr. Sarkozy's confidence that when push comes to shove the enforcement mechanism will not be applied to his country, the second largest euro-zone economy.

Or it may be that he takes comfort from the socialist opposition's promise to oppose such an amendment, a position that makes it certain that Mr. Sarkozy cannot get the necessary votes in Parliament to pass such a measure. Sauce for the euro-zone goose might prove to be too shoddy a recipe for the tastes of discerning French politicians.

What is so odd is that the europhilic German chancellor and French president are proposing a system that might well doom the euro, or at minimum shrink the number in the zone. In contrast to the Maastricht Treaty's toothless "Growth and Stability Pact", the new rules will have tiger-sized dentures. Violators will be cut off from the EU "cohesion funds" that now flow to poorer nations to help them catch up with richer ones. So the income of overly indebted countries that cannot finance themselves in the market would be reduced, a clear invitation to default and exit the euro.

Shrink membership or tighten integration at Germany's expense. That is the crossroads at which the euro-zone politicians find themselves scratching their heads.

—Irwin Stelzer is the director of economic policy studies at the Hudson Institute, Washington