Editor's Note: Mohamed El-Erian, CEO and co-CIO of PIMCO, is the author of When Markets Collide. For more from El-Erian, visit Project Syndicate or follow it on Facebook and Twitter.
By Mohamed El-Erian, Project Syndicate
On a recent trip to Germany, I was struck by two distinct narratives. One narrative features a robust German economy with low unemployment, strong finances, and the right competitive position to exploit the most dynamic segments of global demand. The other narrative describes an economy that is encumbered by never-ending European debt crises whose perpetrators seek to shift their responsibility – and their financing needs – onto Germany’s pristine balance sheet.
Both narratives are understandable. But they cannot co-exist forever. After all, it is difficult to be a good house in a deteriorating neighborhood. Either the neighborhood improves, or the value of the house declines. And it matters a great deal which narrative prevails – for Germany, for Europe, and for the global economy.
Germany today is reaping the benefits of many years of responsible domestic economic management. In addition to maintaining sound public finances, German leaders implemented difficult structural reforms aimed at improving international competitiveness, including painful labor-market reforms. As a result, Germany is one of the few advanced economies today that has created many jobs and maintained financial stability. In other words, it is the AAA of AAAs.
Yet Germany is also part of a highly challenged neighborhood, if not its anchor. Its neighbors include countries – most notably on the eurozone’s periphery – that are struggling. They have high overall unemployment (and alarmingly high youth joblessness), and are unable to grow on their own power. In some cases, they also face solvency questions, and are far from achieving the socio-political consensus needed to get their economic houses in order.
To state the obvious, this contrast between Germany and its neighborhood is very awkward. It fuels endless internal and external tensions, encourages finger pointing, and promotes a loud and disruptive blame game. And all of this distracts attention from the need to compete in a rapidly changing global economy.
The longer all of this persists, the more it tears at the fabric of European unity. Accordingly, European officials need to continue to make steadfast progress in three major areas:
· Improve individual countries’ domestic policy mix in a manner that targets debt sustainability through both growth promotion and deficit reduction, especially in the most vulnerable peripheral economies;
· Enhance the eurozone’s internal financial circuit breakers to reduce the risk of disruptive financial feedback loops and destabilizing multiple equilibria; and
· Strengthen the eurozone’s institutional underpinnings, as well as its mechanisms for policy coordination and peer review.
None of these steps is easy; and they are certainly not automatic. Moreover, to maximize their effectiveness, they must be implemented simultaneously; indeed, this is a situation in which one plus one plus one equals more than three. And this will not happen unless two other, even more controversial steps are taken.
First, Germany must play an even larger role in conducting and coordinating the eurozone’s policy responses. I know that many Germans are uncomfortable with this. But there is no workable alternative for Europe’s well-being – and, therefore, that of Germany.
The European Union’s institutions still lack the authority and credibility needed to take on this role. The European Central Bank does not possess the proper structural policy tools, and it has already been forced to bear burdens that, arguably, are beyond its strictly defined mandate. And there is no other economy that comes close to Germany in size, influence, and economic and financial health.
Second, the eurozone, led by a Germany that is working closely with France, needs to clarify decisively what it intends to look like in the medium term. There are two alternatives, both sensitive and controversial, and the choice is for Europeans alone to make and sustain; but they must make it if they are decisively to put behind them the risk of eurozone fragmentation.
On one hand, they can decide to let politics dominate economics. This is not easy for politicians to sell, especially in the core countries (particularly Germany, Finland, and the Netherlands), as it would involve large multi-year subsidies to the periphery – or the analytical equivalent of the difficult decision made over 20 years ago to reunify Germany at a currency parity. Here, however, there is the added difficulty of a potential conflict between regional politics and national democratic processes.
On the other hand, they can decide to allow economics to prevail. Here, eurozone members would collectively opt for a smaller and less imperfect union that includes countries with more similar initial conditions – economically, financially, politically, and socially. And, again, there is no easy way to do this, especially given that the eurozone was intentionally designed with no exit in mind.
Until these difficult and controversial decisions are made, periods of relative tranquility in Europe are likely to be interrupted by the recurrent eruption of financial instability and bouts of political bickering and dithering. And the longer this continues, the greater the risk that Germany’s neighborhood will erode the robustness of what the country has painstakingly built.
Ultimately, there can be no strong Germany without a stable eurozone; no stable eurozone without a strong Germany; and no global economic stability without both. It is time for Europeans to make the difficult longer-term choices that are critical to sustaining and enhancing their historical regional project.
The views expressed in this article are solely those of Mohamed El-Erian.
Most people wont help a stranger unless they are paid to help. Some might call that being "pragmatic".
Jal, buddy, I have no idea who you hang with, but my friends and neighbours would help anyone in need. Nonetheless, we do not understand your usage of "pragmatic". A pragmatic philosophy considers ideas to be instruments that should guide our actions and their value is measured by their success. It is the rational investigation of questions about existence and knowledge and ethics. It is a philosophical doctrine with attributes of accepting the facts of life and favoring practicality and literal truth. Pragmatism is concerned with actual use rather than theoretical possibilities. Simply, it means a practical, matter-of-fact way of approaching or assessing situations or of solving problems.
Pragmatic is defined as: practical. Antonym: Idealistic. Truly helping people is an idealistic initiative, not a pragmatic one. Practical initiatives take root through contract, whereas idealistic initiatives are inspired.
Scenario: You are in a hurry to get home and watch your favorite show. You are walking your dog through your neighborhood and you see two unleashed dogs come over to you (they got out). What do you do? Nobody is paying you to do anything. It will take lots of effort to get the dogs back to their rightful owner.
Wrong on both counts.
Research again, if you did any research previously
Is it considered pragmatic to be disrespectful?
Don’t be like Fareed and tell everyone the solution is to be more pragmatic. That will just mean nobody will risk their perceived stability to help others, for goodness sake. Define perception, then define Dual as a means to truly understand a complement pair.
You have no idea what you are talking about, do you?
You have no idea what it means to debate (HINT: you have to actually listen and comprehend your counterpart).
To assume that a human could be ultimately pragmatic is ridiculous, as we are caught in a duality of both creation and destruction in our observation. Only god is omniscient and omnipresent.
One of the Axioms of pragmatism is “truth in what works”. How can you apply that to the concept of genetic mutation in nature or by extension, evolution itself?
What about steroid use? I see kids thinking that using steroids makes them better (pragmatism), yet they become mutated, as they are now less healthy than before.
Germany could even be more prosperous than it is now by simply leaving the Eurozone but it won't due to poor leadership. In fact, the current leaders in Europe are starting to make both Hitler and Mussolini look good. Before WW1, Germany had a fabulous period of prosperity!!!
Joseph/J Foster/Marine, we do not understand your determination in breaking up the Eurozone.
You make the same comment about any European country mentioned.
Divide and conquer for allah?
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Late last year, at the height of Europe’s sovereign debt crisis, the Polish foreign minister asked for more German leadership in Europe. Nobody with a sense of history could miss the poignancy of his appeal. “I fear German power less than its inactivity,” Radoslaw Sikorski said. At the Brussels summit Merkel secured her crowning triumph: a new fiscal compact agreed by 25 members to enforce German-style budget discipline throughout the eurozone.
Did it ever occur to you Patrick, that the Polish foreign minister may have been paid off by the C.I.A. or the notorious British MI-6 last year? Maybe if you tried living over there in Europe and found yourself unable to get a job, you may not think that the Eurozone is a good idea either!!!
How would a withdrawal from the Eurozone make a Eurozone country better?
GP, go and look for some job. How long you are hanging on food stamp?
Pls, get your a$$ out from here.
Just come and visit us, once a while. Stop being glued here.
What "difficult longer term choices"? Default is the likely prospect for most Euro nations. get used to the concept and the reality. Germany will absorb a significant hit, but that's what an economic collapses is.
Wishful thinking, Mr. El-Erian! The political uncertainties hang like a sword of Damocles over the Eurozone. The runoff in France this Sunday will decide the future of the Euro. True, Germany is economically strong, yet it's doubtful if Angela Merkel could pull the Eurozone through the crisis without Sarkozy. If Francois Hollande gets elected, I'm sure he would find a compromise with Angela Merkel as it wouldn't be wise for France to change course so abruptly. Holland, one of the strong pillars of the Eurozone is facing a political crisis due to austerity measures. The coming elections might see the strengthening of the right wing party led by the controversial Geert Wilders. Greece is also facing elections and right wing fringe parties are on the rise. All these right wing parties are national and xenophobic. We might be seeing a revival of the 1930's in Europe.
Well put, j.von hettlingen. Maybe what happened in Europe in 1930's counld be the best thing that can happen today. But then again, almost anything is preferable to the status quo!!!
please read. NATIONALISTIC
Nationalism is exactly what the Europeans need these days!!! It led to the unification of both Germany and Italy in the 1870's. What Europe doesn't need is union ran by the right-wing thugs in Washington who don't even live over there!!!
To assume that a human could or should be ultimately pragmatic is ridiculous, as we are caught in a duality of both creation and destruction in our observation.
Wow! Just like...transition from Zimmerman into Germanman. Will...show in similar neighbourHOOD?
I guess, HOOD off might save the life. At least, to be around for few years.
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