France and the Netherlands Strike Back
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Jean Pisani-Ferry
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30 April 2012.




BRUSSELSIn 2005, France and the Netherlands both voted no to a constitutional treaty for the European Union, derailing years of integration efforts. They seem to be poised to disrupt Europe once again.


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On April 21, the Dutch coalition government collapsed, after right-wing populist Geert Wilders refused to endorse the spending cuts needed to limit the budget deficit to 3% of GDP. The next day, candidates who advocated backtracking on European integration captured one-third of the vote in the first round of the French presidential election. On May 6, France is expected to turn left and elect François Hollande, who questions the EU’s German-inspired fiscal compact, agreed last December, and has called for Europe to emphasize growth.


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These are the first skirmishes in a highly significant debate for Europe. The debate revolves around two major issues: austerity and integration.


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Start with austerity. The question here is not whether deficits should be reduced. They must be, given the dire state of European public finances, and also because the countries whose competitiveness deteriorated during the first decade of monetary union must tighten fiscal policy in order to deliver the necessary adjustment of wages and prices.


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Indeed, it is revealing that, as eurozone countries with severe external imbalances at the onset of the crisis have benefited from the European Central Bank’s wholesale liquidity provision, they have reduced their current-account deficits much less than non-euro countries in a similar situation. Germany, the arch-advocate of austerity, is right on this point.


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The problem is that austerity has perverse effects. Private and public deleveraging can hardly take place at the same time, unless trade partners generate demand for exports. Recession and price deflation reduce tax receipts and worsen the dynamics of public debt, threatening the return to sustainability. Moreover, deficit targets lead governments to respond to recessions by doubling down on austerity, generally without much regard for the adverse supply-side effects.


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So there is a need to approach austerity and rebalancing strategically. And here, the EU has made three mistakes.


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First, finance ministers tried to reassure markets last October by demonstrating toughness and endorsing headline, instead of cyclically adjusted, deficit targets. This may be justified for a country on the verge of losing access to capital markets, but not for a country with relatively low debt and a moderate deficit. Ministers should change course and revert to their original 2009 commitment, which was to plan consolidation efforts and adhere to them through fluctuations and shocks.


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Second, the eurozone still shies away from a comprehensive approach to its internal rebalancing. Price competitiveness is a relative concept, not an absolute value, yet the policy discussion still ignores this basic fact. This is paradoxical, because the ECB’s policy framework provides clear guidance. The ECB is committed to 2% inflation in the eurozone as a whole, which implies that lower wage and price increases in southern Europe arithmetically mean higher wage and price increases in northern Europe. The wider the gap between the two, the sooner the rebalancing will be achieved.


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It is time to say loud and clear that the ECB will fight hard to keep average inflation on target, and that northern Europeespecially Germany – will not attempt to counter higher domestic inflation as long as price stability is maintained in the eurozone as a whole. This would help significantly in mapping out a sensible rebalancing strategy.


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The third mistake is one of omission: as ECB President Mario Draghi recently said, Europe has a fiscal compact, but lacks a growth compact. To be sure, there are no quick fixes: headline-grabbing initiatives often fail to measure up to the challenge of reviving growth. Nevertheless, serious discussion is needed concerning how to use the EU budget to enhance economic performance, rather than for redistribution only; how to foster pro-growth reforms at the national level; and how to boost investment in the periphery countries’ tradable sectors.


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A credible growth compact would help to overcome immediate hurdles. After all, the post-war Marshall Plan was so successful not because of its size, but because it helped to counteract zero-sum games and self-fulfilling pessimism. That is a lesson to keep in mind today.


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But austerity is not the only dimension of the debate. Developments over the last two years have exposed the weaknesses of a bare-bones monetary union based only on a single monetary policy and fiscal discipline. While reforms enacted in the wake of the Greek crisis have equipped the eurozone with crisis-management capabilities, more is needed to restore confidence, ensure financial stability, and ward off financial fragmentation.


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A key characteristic of the European crisis has been the strong correlation between banking stress and sovereign distress. Time and again, banks’ woes have affected governments’ borrowing costs, and concerns over governments’ solvency have affected banks’ balance sheets.


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This major potential threat to financial stability has been alleviated, but not eliminated, by the ECB’s large-scale provision of liquidity. The recent re-emergence of concerns about Spain has shown that the problem has not gone away.


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Systemic reforms to resolve the problem all involve significant further integration: joint issuance of government bonds that play the role of safe asset in banks’ portfolios, a “banking union” with a common regime for deposit insurance, supervision, and crisis resolution – or both. Either one involves risk-sharing among eurozone members.


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In France, the Netherlands, and elsewhere, many citizens view Europe as a threat to their way of life. Telling them that the euro is an unfinished construct that requires even more commitment is a hard call for politicians. The question for the coming months is whether European leaders will have enough political capital to embark on further reforms and make the case for them to angry publics. If not, it is to be feared that they will agree only on platitudes and hope for the best.



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Jean Pisani-Ferry is Director of Bruegel, the Brussels-based economic-policy think tank, and Professor of Economics at Université Paris-Dauphine. He was an adviser to the European Commission’s Directorate-General for Economic and Financial Affairs, and was Director of CEPII, France’s leading international economics research institute. He has also served as Senior Economic Adviser to the French finance minister, Executive President of the French prime minister’s Council of Economic Analysis, and Senior Adviser to the director of the French Treasury.

miércoles, mayo 02, 2012

THE MAN WHO ALWAYS SMILES / DER SPIEGEL ( A MUST READ )

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05/01/2012 01:55 PM
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France's Enigmatic François Hollande
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The Man Who Always Smiles
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By Mathieu von Rohr




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All eyes in Europe are on François Hollande, the Socialist candidate who could become France's next president on Sunday. The reserved technocrat has become more confident and presidential during the campaign, and makes up for his shortcomings as an orator by showing genuine empathy with people. But even his friends say he is hard to fathom.



At around noon on the day after his victory, François Hollande steps off a private plane at the airport in Quimper, a small city in Brittany. As he walks past the baggage conveyor belt and into the terminal, he seems almost aglow with certainty, but he also looks tired and disheveled.



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Late the night before, he had flown to Paris from Tulle, his election district in southwest France, and had celebrated his triumph in the first round of the presidential elections until the early morning hours at the headquarters of the Socialist Party. He was in such high spirits that he was still giving interviews in front of his house. Now the interviews continue in the terminal at Quimper, where he says: "I received more votes than Mitterand did in 1981."



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Hollande is wearing his candidate's uniform, a black suit and tie, which he alternates with a blue suit, and rimless glasses. He keeps his thinning hair combed in a way that's meant to cover up his bald spots and, as is always the case when he speaks with people, he is smiling.


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The campaign has done something to François Hollande. He began as an inconspicuous and sometimes awkward-seeming man. There is still something of the accountant about him, but he also comes across as presidential. In the last few months, he has grown to larger-than-life proportions, buoyed by the cheers of his supporters and filled with a growing belief in his ability to win the election.



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A friend who has known Hollande since 1985 is waiting to greet him at the airport café. He is Bernard Poignant, the mayor of Quimper. "I remember when he was at a point that was so far removed from the position where he is today," says Poignant, who is visibly moved. "People already saw him as eliminated and buried. I knew that it wasn't true."



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If Hollande feels any sense of satisfaction, he hides it well. But of course he remembers the day when he resigned as his party's leader three-and-a-half years ago. His former partner Ségolène Royal had lost the 2007 election against current President Nicolas Sarkozy, and the Socialist Party almost broke apart as a result. At the time, it seemed absurd to even consider that Hollande could ever be president. Now Royal is reluctantly campaigning for him.



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The polls predict a clear victory for Hollande in the runoff election this Sunday. If they are right, Hollande will become the second Socialist after François Mitterrand to be elected president in the Fifth Republic.


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'He Has This Mysterious Side'


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If that happens, German Chancellor Angela Merkel will encounter a new partner in Europe, one who has already announced that he intends to put an end to her austerity policy and that he wants Europe to stimulate growth to overcome the crisis. His election is important for the entire continent, and that makes it important to understand who he is.



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Oddly enough, though, as this election campaign nears its end, no one seems to know who Hollande really is and what can be expected of him. Even Poignant, his old friend in Brittany, is somewhat at a loss. "I have the same feeling with him," he says. "He has this mysterious side. He's always been like that."



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During the campaign, and in the days before and after the first round of voting, Hollande has come across as a man who plays his role as a candidate with uncanny perfection. Nothing he says is imprudent, and yet despite this self-control he still seems likeable. His routine borders on the superhuman. For months now, his days have begun early in the morning and ended late at night. He sometimes visits three cities a day, and near the end of his day, when the journalists accompanying him are exhausted, he still seems alert and rested.



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What distinguishes him as a politician is his ability to show empathy. Hollande seems to sense what people want to hear. Last Wednesday, he spoke to factory workers in the northern French city of Montataire who were about to lose their jobs. "I am here," he told them. "But getting here is easy. The important thing is to come back!" The men who welcomed him with skeptical glances start nodding.




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Later on, as he sits in a café in the northern city of Amiens, surrounded by high-school and university students plagued by fears about the future, he says that he knows that, at their age, they want to stand on their own two feet. "You want independence. I understand that." The young voters nod.


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A Technocrat Who Shows Empathy



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Making people feel that you understand them is a gift. Hollande has it, unlike Sarkozy, for whom interacting with citizens is a burden. During factory tours, for example, Hollande converses cheerfully with the workers. He seems relaxed, even though he keeps his hands locked so tightly together behind his back that his knuckles protrude.



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His weakness is that he is basically a technocrat, a numbers man, which frequently gets in his way, both in interviews and in his speeches. He is effective at delivering emotionally charged speeches and conjuring up France's illustrious past, and the legacies of the French Revolution, the Résistance and socialism, as he does in a speech in Carmaux in the southwest, standing in front of a statue of Socialist Party co-founder Jean Jaurès. But then he becomes bogged down in the details of his platform, using hackneyed phrases. He seems serious, and yet he lacks the ability to inspire people.



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Hollande has no spin doctors. He is his own most important campaign manager, and his strategy is simple: to seem more presidential than the president. To achieve this goal, he channels François Mitterrand. When Hollande speaks, he copies Mitterrand's gestures and his way of speaking. It seems almost uncanny at times, as if he were a reincarnation of Mitterrand. He also finds himself in a strategic situation similar to that of Mitterrand when he defeated Valéry Giscard d'Estaing in 1981. "At the time," he says, "the incumbent also focused on the fear of the left, while Mitterrand emphasized hope."



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No one can say with certainty what kind of a president Hollande would be. He has the reputation of being a pragmatist, which suggests that he could quite possibly get along better with Merkel than one might surmise today. But although he is seen as a moderate socialist in France, his worldview is traditionally leftist. For Hollande, growth is something that should ultimately be left up to the state -- or Europe and its central bank. He says that he is for "a serious budget, but against life-long austerity."




Nevertheless, his platform contains many costly ideas that could result in €20 billion ($26 billion) in additional expenditures. Whether Hollande would have the strength to reform France from the bottom up, or whether he would become something of a Chirac of the left, that is, a passive regent, remains to be seen.



.Departure From Austerity in Europe




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Merkel's refusal to meet with him, along with her support for Sarkozy, will not make future cooperation any easier. "It was certainly interesting that I wasn't received," says Hollande. A growing self-confidence has been evident in his campaign speeches in recent weeks. Hollande believes that his election will signify a departure from austerity policies for Europe, and it often sounds as if he were convinced that this would solve most things.



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On the afternoon after his arrival in Quimper, Hollande takes a walk through the historic district. The campaign uses the term "deambulation" to describe these moments, and the chaos that ensues when the candidate turns up in a busy pedestrian zone. When that happens, all that is visible to an outside observer is a dense crowd of people surrounding Hollande, who is not a tall man. His position in the crowd can only be ascertained by the location of the microphones suspended above his head like antennae. He reaches out across his bodyguards to connect with passersby, who call out "Keep it up!" He can conjure up a smile in an instant, a smile that looks natural and genuine, except that his eyes remain serious.



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It's a stormy day as several hundred people stand under their umbrellas in the pouring rain, listening to Hollande speak in front of the cathedral. He leans forward, pushing his vocal chords to the limit, which is why he often sounds as if he were about to lose his voice. "I will protect you, Sarkozy said. And? Has he protected you?"



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'Always Underestimated'



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Hollande is not a great speaker, unlike Sarkozy, but he gave an important speech at the end of January in an auditorium near Paris, when he put his campaign in the context of France's history, and of socialism. It was his most significant appearance, because it was the first time he seemed presidential. He had been a loyal party soldier for years, but in all those years, he never made it to the top and was never a member of any administration. He is currently the president of the General Council of the département, or administrative district, of Corrèze. His fellow party members have variously derided him as a "Flamby," or wobbly pudding, a "Marshmallow" and a "Woodland Strawberry."




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"People have always underestimated him," says Stéphane Le Foll, one of his campaign managers. Le Foll was already his office manager when Hollande was first secretary of the Socialist Party, from 1997 to 2008. Hollande is a reserved person, says Le Foll, someone who never shows his emotions and yet is very accessible and assertive. A few weeks ago, Hollande's 28-year-old son Thomas said: "I am like my father. I can't say no."





While leading the Socialist Party, Hollande was known as the "man of synthesis." He would sit in a room with the representatives of all wings of the party and have them present their views, and by the end of these meetings, he could summarize what had been discussed in a way that reflected what everyone had said, but without revealing his own position. It would be a radical shift for France to be run by someone who seeks compromise -- and it isn't clear yet whether this would work.



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There is a chapter in his life that Hollande doesn't mention very often: his childhood. He was born in the northwestern city of Rouen in 1954. His biographer Serge Raffy writes that Hollande suffered under his authoritarian father, an irascible doctor who ran under a right-wing extremist platform in local elections. According to Raffy, his smile and his jokes already helped Hollande steer clear of conflicts at the time.



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One of those rare intimate moments with Hollande during this campaign takes place in Tulle, the small city in southwest France where his political career began. It is the Saturday evening before the first round of voting, and the main shopping street is empty. Hollande is standing in a leather goods shop with his partner, the journalist Valérie Trierweiler, buying a gray handbag.




.They step out of the shop together and walk, arm-in-arm, a few steps along the street. She lovingly wipes something away from the candidate's chin. He seems tense and even a little lost. It must be the first time in weeks that he hasn't been surrounded by a crowd.


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Hollande knows most of the people in Tulle, where he served as a member of the city council and later as mayor. Tulle is what the French call his fiefdom. The former monarch, Mitterrand, had sent Hollande to Corrèze when he was 26 to capture a seat in parliament against Jacques Chirac, who later became president. "It was an unusual decision to go there," says his old friend, Quimper Mayor Poignant. Hollande lost the election. "But he didn't go back to Paris. He stayed. That's exceptional and says a lot of about him." His career began in this rural district, Corrèze, and it was there he learned to be folksy.



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Now he could very well be on the verge of attaining the highest office in the French republic. If he wins, many Frenchmen will be glad to be rid of Sarkozy, and yet Hollande doesn't exactly generate enthusiasm among his own voters. This becomes evident when, on the last day of his campaign before the first round of elections, he travels to Vitry-le-François in eastern France, where there is high unemployment and the right-wing populist Front National is strong. Of the 3,000 jobs that once existed in the local industry, only 300 remain in place today.


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Although the local newspaper went to great lengths to announce his visit, there is almost no one waiting to greet him -- except the usual throng of journalists crowding around him. The candidate eventually walks into a few clothing stores and bakeries, where he shakes the hands of the salespeople. He manages to pull off this disappointing appearance in a crowd that never materializes with as much dignity as possible. A drunk shouts after him: "There's nothing here. It's always like that in Vitry. And no one has ever kept his promises here."



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But by then François Hollande and his entourage are long gone.


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Translated from the German by Christopher Sultan


Germany’s Neighborhood Watch

Mohamed A. El-Erian
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01 May 2012








FRANKFURT 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.



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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.


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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 countriesmost 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.


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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.


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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.



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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 conditionseconomically, 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.


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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.


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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.


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Mohamed A. El-Erian is CEO and co-Chief Investment Officer of the global investment compamy PIMCO, with approximately $1.4 trillion in assets under management. He previously worked at the International Monetary Fund and the Harvard Management Company, the entity that manages Harvard University's endowment. He was named one of Foreign Policy's Top 100 Global Thinkers in 2009, 2010, and 2011. His book When Markets Collide was the Financial Times/Goldman Sachs Book of the Year and was named a best book of 2008 by the Economist.



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Copyright Project Syndicate - www.project-syndicate.org