Attack of the Euro Wonks

Italians have a name for their new leadership: Government Sachs. It’s a nod to the fact that the technocrats taking over European governments have shockingly similar backgrounds. “Super Mario” Monti, Italy’s Prime Minister, and Lucas Papademos, the new head of Greece, are both U.S.-trained economists who were top E.U. bureaucrats before taking on their current posts. Monti did a stint at Goldman Sachs, as did the recently appointed head of the European Central Bank, Mario Draghi.

On the one hand, it’s reassuring to have a man who taught a class at Harvard’s Kennedy School titled the Global Financial Crisis: Policy Responses and Challenges heading an economic basket case like Greece. On the other, it was Goldman that helped devise the derivatives that allowed Greece to disguise its massive debt in the first place. It also raises some tricky issues. In the U.S., one of the threads connecting the Tea Party and Occupy Wall Street is the belief that there’s an entitled elite running the show, exemplified by the revolving door between the U.S. Treasury Department and Goldman Sachs.

In Europe there’s a sense that many of the people in favor of keeping the common currency are part of a cosmocratic elite represented by the likes of Super Mario and his crew. Average people would be glad to secede from the union and resume being themselves. Italians and Greeks could devalue their currencies and go back to la dolce vita; Germans could get back to work. Everyone would be happy.

Of course, it’s not that simple. A full-scale breakup of the euro zone would hurt every nation in Europe. The countries are now too economically enmeshed for anyone to disengage easily. And the euro zone, in the midst of a worsening debt crisis, absolutely needs leaders who understand bond rather than bikini curves (arrivederci, Berlusconi). But Europe also needs real political buy-in from its electorates to complete the hard work ahead–carrying out extremely painful cuts to pensions, health care, education and social programs, while trying to reform tax systems and black markets. Why should we expect unelected technocrats to do better than popularly elected officials?

Part of the answer to that question lies in how fast the technocrats can bind the gaping wound that is the euro zone. While markets rose briefly with the resignation of Berlusconi and the formation of a new government in Greece, bonds tell the true story, and the spread between German yields and those of Italy and France are at euro-era highs, meaning investors are still plenty worried. No wonder. European industrial production is flagging, consumer confidence is nil, and growth–a mere 0.2% in the past quarter–is kaput. A double-dip recession, says Barclays Capital economist Michael Gavin, “is now baked into the pie.”

To turn this tide, the technocrats first need to bring the political fringes together. Political extremism has grown as the economy has worsened. Monti knows this and has already talked about having various political factions in Italy sit down and parse all the compromises needed to balance growth and austerity. Sounds good, yet it makes me nervous that his model for this sort of come-to-Jesus moment is the U.S. Congress budget supercommittee–the one poised to deliver bookkeeping gimmicks everyone will hate. Apparently, Monti views it as a model for reaching bipartisan agreement. Hmmm.

Putting aside the obvious question marks there, the last thing Europe needs is a supercommittee. What it needs is what it has needed all along: real political leadership from real politicians. There’s only one person who can fill that role right now–Angela Merkel. I am relieved to see that Merkel seems to have progressed from halfhearted crisis management to real advocacy of the euro and the union. You can hear it in the urgency of her words. She recently told her party that Europe is facing “the most difficult hours since World War II” and what was needed was “not less Europe, but more.” She implored Germans to embrace the task of their generation, “to complete the economic and currency union in Europe and create, step by step, a political union.”

These words–the strongest Merkel has uttered since the crisis began–are Europe’s best hope. Now she has to persuade her electorate to back the talk with German money. Even if the technocrats clean up Europe’s weakest economies tomorrow, the weaklings are going to need the stronger nations like Germany to bolster them–either by supporting European Central Bank efforts to do so or by issuing common bonds with the promise that Germans will stand behind Italian debt because they are all citizens of Europe. It’s a solution that is as emotional as it is technocratic. But it’s exactly what Europe needs right now.