For Germans, the question isn't whether to save the euro. It's when to save the euro. For the rest of us, the question is whether the Germans will wait until it's already too late.


Protesters demonstrate against banking and finance in front the headquarters of the European Central Bank in Frankfurt in October. (RALPH ORLOWSKI/REUTERS)

That's really the key to understanding the German psychology on the euro. In America, we keep asking why they don't join with the European Central Bank to end the run on the European periphery. The answer is simple: they don't want to end the run on the European periphery. To them, the run on Italy and Greece and Portugal and Spain is a feature, not a bug. It's leverage, and they want to use it.

Look how much it has already gotten them. Greece, Portugal, Italy and Ireland are working their way through stringent deficit-reduction plans. The widely disliked governments of Greece and Italy, which proved unequal to the task of fiscal reform, have been toppled. There is a good chance that the euro zone might become what Germany has always wanted it to be: a fiscal union, in which the members meet their deficit targets and reform their labor markets. And none of this would have happened without the markets making their run at the European periphery.

So to understand the German position, look at it from their perspective: Why in the world would Germany let up the pressure now? When they're so close to amending the very treaty underlying the euro zone? When France has joined with them on a set of reforms? When the market is doing what the Germans never could?

I worry this makes the Germans sound like puppetmasters. They're not. Many of their intended reforms are very sensible. The flaws they point to in the euro zone are, indeed, deep, structural flaws in the euro zone. They do envision a future that includes sacrifice on their part: eurobonds that raise Germany's cost of borrowing and a bailout fund -- excuse me, a fiscal stabilization fund -- that they contribute heavily to.

So my concern isn't that the Germans are selfish and calculating. It's that, without quite realizing it, they have become reckless. They are trying to time the market, betting that they can, in essence, manage the run -- that they can do just enough to keep the pressure on without letting matters get totally out of hand. They are like a doctor who, faced with an unhealthy patient presenting signs of a heart attack, demands to see the patient lose weight before they will administer the life-saving treatment.

In almost all of their arguments, the Germans are right. The euro does need to be fixed. But first it needs to be saved. The Germans are betting that this is their opportunity to do both. If they're right, it will have been a remarkable play. If they're wrong, it will have been a disastrous one.

Top stories

1) France and Germany want a new EU treaty, reports Edward Cody: "Under growing pressure from nervous financial markets, the leaders of France and Germany reached a difficult compromise agreement Monday to seek mandatory limits on budget deficits among debt-laden European governments. Their accord, which requires rewriting a major European Union treaty, was designed to eliminate the leading cause of doubt about European financial health...If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world. Underlining the high stakes, Standard & Poor’s announced in New York that 15 nations using the euro are being placed on a credit watch, risking a downgrade in their creditworthiness rating because of failure to rein in the crisis."

2) S&P is threatening to downgrade 15 Eurozone countries, report Gabriele Steinhauser and Greg Keller: "Standard & Poor’s threatened Monday to downgrade the credit rating of 15 euro-zone countries, piling pressure on the currency union’s leaders to take radical steps to resolve their debt crisis at a summit later this week. The decision to put 15 euro- zone countries -- including AAA-rated nations such as Germany and Luxembourg -- on watch for a possible cut in their credit worthiness also threatens to throw the euro zone’s bailout mechanism into disarray, since the rescue fund relies on those countries’ stellar rating to cheaply raise money on the markets...The only two euro nations not put on credit watch were Cyprus, which was already under review, and Greece, which already holds the world’s worst rating."

3) A Eurozone collapse would likely trigger a US recession, reports Howard Schneider: "To get a sense of how vulnerable the U.S. economy could be if the euro currency union cracks apart, start with the volume of U.S. exports to the euro zone -- $153 billion in the first six months of the year. Add several hundred billion dollars in investments by U.S. banks in the euro zone and several trillion dollars’ worth of other financial contracts between the two economies. As European leaders meet later this week to try to resolve their spreading debt crisis and prevent the breakup of the 17-nation euro zone, U.S. politicians, corporate leaders and financial analysts are watching anxiously for a breakthrough. The alternative could be staggering for the U.S. economy. American banks and other companies could find themselves battling with any country that leaves the euro union and reinstates its own currency."

4) Congressional Democrats and Republicans are out with competing payroll tax cut plans, report Manu Raju and Jake Sherman: "December drama has hit the Hill. President Barack Obama and congressional Democrats are on a collision course with Republicans over extending a payroll tax break that expires at year’s end, with both sides pushing new proposals that diverge dramatically over how to pay for the tax cut. Senate Majority Leader Harry Reid announced Monday a new $180-billion plan to extend a payroll tax break that he scaled back in order to win Republican support. House Republicans are expected to unveil Tuesday a broader $200-billion plan that would be largely paid for by cuts to Medicare benefits given to richer Americans and pay cuts for federal workers. Both plans will almost certainly fail to clear Congress in their current forms."

Top op-eds

1) Obama could use his pardon power to implement the DREAM Act, writes Gregory Koger: "So, how could President Obama use this power to advance his policy agenda? The most salient option would seem to grant relief to some or all of the 10.2 million undocumented immigrants living with our borders...While President Obama has the constitutional power to grant unconditional amnesty (permanent residency) to all these persons, it would be more likely that he would grant pardons to subsets of immigrants who meet certain conditions. This could include: Following the 2006 Senate Republican proposal, using the pardon power to suspend deportation or punishment for undocumented persons who have been in the U.S. for five years and pay a fine and back taxes; Following the DREAM Act, pardoning anyone who arrived in the U.S. before the age of 16, and graduated from high school."

2) Moralizing doesn't do Europe any good, writes Joseph Stiglitz: "Even if those from Europe’s northern countries are right in claiming that the euro would work if effective discipline could be imposed on others (I think they are wrong), they are deluding themselves with a morality play. It is fine to blame their southern compatriots for fiscal profligacy, or, in the case of Spain and Ireland, for letting free markets have free reign, without seeing where that would lead. But that doesn’t address today’s problem: huge debts, whether a result of private or public miscalculations, must be managed within the euro framework. Public-sector cutbacks today do not solve the problem of yesterday’s profligacy; they simply push economies into deeper recessions."

3) Regulations aren't holding back the economy, writes David Brooks: "George W. Bush issued regulations over eight years that cost about $60 billion. During its first two years, the Obama regulations cost between $8 billion and $16.5 billion, according to estimates by the administration itself, and $40 billion, according to data collected, more broadly, by the Heritage Foundation. That’s a significant step up, as you’d expect when comparing Republican to Democratic administrations, but it is not a socialist onslaught. Nor is it clear that these additional regulations have had a huge effect on the economy...The Bureau of Labor Statistics asks companies why they have laid off workers. Only 13 percent said regulations were a major factor. That number has not increased in the past few years...Some of the industries that are the subject of the new rules, like energy and health care, have actually been doing the most hiring."

4) Jon Huntsman is a real conservative, writes James Pethokoukis: "Huntsman, like Thatcher, seems to be a conservative of intuition derived from personal experience. Huntsman a conservative? As governor, he massively cut income and sales taxes--instituting a 5 percent flat income tax--while expanding the state’s 'rainy day' reserve fund. His approach to healthcare reform relied on markets rather than mandates. As the Club for Growth describes it, 'Utah’s main health reform contained no individual mandate, no employer mandate, and has very limited regulatory authority...It empowers individuals to take ownership of their own health insurance and to choose coverage that works for them.' If elected president, Huntsman says he would like to slash tax rates to their lowest levels since before America entered World War I and eliminate taxes on capital gains and dividends."

5) On education, the federal government should do what it does best, write Linda Darling-Hammond and Rick Hess: "We disagree on much, including big issues like merit pay for teachers and the best strategies for school choice. We agree, though, on what the federal government can do well. It should not micromanage schools, but should focus on the four functions it alone can perform. First is encouraging transparency for school performance and spending. For all its flaws, No Child Left Behind’s main contribution is that it pushed states to measure and report achievement for all students annually. Without transparency, it’s tough for parents, voters and taxpayers to hold schools and public officials accountable. However, No Child Left Behind also let states use statistical gimmicks to report performance...States should be required to link their assessments to the National Assessment of Educational Progress."

Cover song interlude: Little Scream play "Jesus" by the Velvet Underground.

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Still to come: Regulators are banning deals like the ones that sunk MF Global; a small business bankruptcy could throw a wrench into an anti-health reform lawsuit; Mexican border arrests are way down; a panel wants BP's fines to go to Gulf cleanup; and a rapping baby.

Economy

Regulators are banning deals like MF Global's, reports Josh Boak: "Financial regulators Monday banned the kinds of in-house deals that may have contributed to the the bankruptcy of MF Global and the downfall of Jon Corzine, the former New Jersey Democratic governor and senator whose ties to Wall Street once made him a possible contender to become the next Treasury secretary. The Commodity Futures Trading Commission voted 5-0 on a rule stemming from the Dodd-Frank reforms that limits how futures brokerages can invest their customers’ money. MF Global, where Corzine had served as the chief executive, is missing an estimated $1.2 billion in customer funds, though it’s unclear whether the brokerage siphoned off client money through repurchase agreements that are now forbidden by the rule. The agreements allowed the brokerage to borrow from its customers."

An OECD report warns about rising income inequality across the developed world, reports Michael Fletcher: "Income inequality is increasing across much of the developed world, a trend that will continue unless governments move aggressively to arrest it, according to a report released Monday by the Organization for Economic Cooperation and Development. The widening gap between rich and poor is being driven in part by a growing disparity in wages, as skilled workers command a disproportionate share of the bounty made possible by technological progress, the report said. In addition, a surge in foreign direct investment and a looser regulatory regime that has reduced employee protections have led to a wage premium for high-skill financial jobs and fewer rewards for workers at the bottom, the report said. The result is the highest level of income inequality in more than three decades, according to the Paris-based OECD."

Mitt Romney wants a payroll tax cut extension, reports Ashley Parker: "On Monday, Mitt Romney embraced one of President Obama’s signature proposals -- another one-year extension of a cut in payroll taxes, after just weeks ago deriding the idea as 'little Band-Aids' that offered only a temporary fix. 'I would like to see the payroll tax cut extended just because I know that working families are really feeling the pinch right now -- middle-class Americans are having a hard time,' Mr. Romney said Monday on Michael Medved’s conservative radio talk show. Newt Gingrich, currently Mr. Romney’s main rival for the nomination, said months ago that he favored an extension. Though Mr. Romney’s remarks represented a shift in tone on the payroll tax cut, he had never specifically opposed extending the tax breaks, instead arguing that Mr. Obama’s proposal was a temporary fix rather than a long-term solution."

Retail jobs won't fix US unemployment, writes Edward Glaeser: "Last week’s jobs report delivered some good news: The unemployment rate dropped to 8.6 percent from 9 percent, and the decline was particularly notable among less educated Americans. Trouble is, more than 40 percent of the job growth was attributable to a healthy expansion in retail trade, which underscores a larger economic problem. Although entrepreneurial innovation usually leads to significant job creation, the great retail entrepreneurs of the past 30 years -- from Amazon.com Inc. (AMZN) to Wal-Mart Stores Inc. -- have produced efficiency rather than economywide employment...The job-creation rate in retail trade boomed at more than 20 percent per year for each year from 1984 to 1988. The job- creation rate in retail has never again broken 20 percent, and the downward trend runs at 2.6 percentage points per decade."

When borrowing is free, the US government shouldn't be "paying" for stimulus, writes Matthew Yglesias: "Cheap money is better than expensive money. But what you never get is an offer of free money. The idea, always, is that someone will give you some money today and in exchange you have to give him back more money later on. Unless, that is, you’re the government of the United States of America, and lenders are willing to pay for the privilege of lending you money...That’s what makes the debate over how to offset the fiscal impact of a payroll tax extension so maddening. Taxes are the principal way of paying for military expenditures and public services because under normal circumstances it’s much cheaper to pay for the things you’re buying than to borrow money. But under today’s interest rate conditions, it’s more expensive to pay the bills out of taxes than to just borrow the money."

Vintage newsreel interlude: A French couple gets married on a tight rope in the 1950s.

Health Care

A small business bankruptcy could disrupt the legal case against health reform, report Emily Maltby, Vanessa O'Connell and Jess Bravin: "The woman chosen to represent the legal challenge to the Obama administration's health-care overhaul filed for bankruptcy in September after her business failed, a move that could pose problems for the high-profile lawsuit. The suit, brought by 26 states and joined by the National Federation of Independent Business, a small-business lobby group, is set to be heard by the Supreme Court next year. It relies in part on the story of Mary Brown, an auto-repair-shop owner who argued in court filings she would have had to divert funds from her business to comply with the law's requirement that, beginning in 2014, most Americans obtain coverage or pay a penalty...Without owning a business, it could be harder for Ms. Brown to argue she is harmed by the legislation."

The health care case plaintiff's bankruptcy makes the case for reform, writes Jonathan Cohn: "The predicament of small business is more an argument for the Affordable Care Act than against it. The first time I ever heard about Brown was more than a year ago, when Harris Meyer, the veteran health care reporter, wrote about her decision to file suit. As Meyer explained then, a small business owner like Brown likely would be eligible for substantial subsidies. Depending on Brown's specific financial circumstances, those subsidies could allow her to obtain insurance not only for herself but also for her employees, to whom, according to Meyer’s story, she had not been able to provide coverage. Better still, starting in 2014 Brown could buy insurance through one of the new exchanges - where all plans must include an essential benefits package and where insurers cannot discriminate against people based on medical condition."

Donald Berwick could have accomplished much more if confirmed, writes Joe Nocera: "What did Berwick accomplish in those 17 months? A lot -- though not nearly as much as he would have liked to. His focus, as it has always been, was on improving the quality of health care and cutting costs...Health insurers and hospitals, who had generally thought of Medicare as little more than a stodgy, bureaucratic insurer, began to see it in a different light as well, as Medicare staffers, trained as 'improvement coaches,' began to share ideas and push for simple, sensible steps that would, for instance, keep people with chronic medical problems from having to be constantly readmitted to the hospital. Of course, 17 months is hardly enough time to complete such a transformation, and it is hard to know if Berwick’s emphasis on quality will stick. What he needed, most of all, was more time -- precisely what the Republicans wouldn’t give him."

Selling kidneys should be legal, writes Alexander Berger: "It has been illegal to compensate kidney donors in any way since 1984. The fear behind the law -- that a rich tycoon could take advantage of someone desperately poor and persuade that person to sell an organ for a pittance -- is understandable. But the truth is that the victims of the current ban are disproportionately African-American and poor. When wealthy white people find their way onto the kidney waiting list, they are much more likely to get off it early by finding a donor among their friends and family (or, as Steve Jobs did for a liver transplant in 2009, by traveling to a region with a shorter list)...A well-regulated legal market for kidneys would not have any of these problems...Only the government or a chosen nonprofit would be allowed to purchase the kidneys, and they would allocate them on the basis of need rather than wealth."

Domestic Policy

Mexican border arrests are way down, report Nick Miroff and William Booth: "Arrests of illegal migrants trying to cross the southern U.S. border have plummeted to levels not seen since the early 1970s, according to tallies released by the Department of Homeland Security last week, a historic shift that could reshape the debate over immigration reform. The Border Patrol apprehended 327,577 illegal crossers along the U.S.-Mexico border in fiscal year 2011, which ended Sept. 30, numbers not seen since Richard Nixon was president, and a precipitous drop from the peak in 2000, when 1.6 million unauthorized migrants were caught. More than 90 percent of the migrants apprehended on the southwest border are Mexican. The number of illegal migrants arrested at the border has been dropping over the past few years but appears to be down by more than 25 percent this year."

Romney is raising a lot more from billionaires than Obama is, reports T.W. Farnham: "The Republican presidential primary contest isn’t over, but in the race to line up the richest donors, it’s Mitt Romney vs. President Obama. Romney has drawn the most support from billionaires, with at least 42 donating to his campaign. Obama is not far behind, with at least 30 billionaire supporters. Rick Perry and Jon Huntsman Jr. follow with 20 and 12, respectively, according to donor rolls and the current Forbes magazine list of 412 American billionaires. Very wealthy donors are likely to play a greater role in this election cycle in the wake of recent court decisions that have loosened rules for campaign contributions. That will only heighten one of the dominant narratives of the 2012 campaign: the nation’s rising income inequality and the outsize political influence of the super-wealthy."

The American Legislative Exchange Council makes it easy for businesses to buy the laws they need, report Brendan Greeley and Alison Fitzgerald: "The American Legislative Exchange Council, a nonprofit based in Washington, brings together state legislators, companies, and advocacy groups to shape “model legislation.” The legislators then take these models back to their own states. About 1,000 times a year, according to ALEC, a state legislator introduces a bill from its library of more than 800 models. About 200 times a year, one of them becomes law. The council, in essence, makes national policy, state by state...Corporations, think tanks, and trade groups can join ALEC, too. Currently, about 300 are members. They pay up to $25,000 in yearly dues and can spend more to sponsor the council’s meetings...The structure effectively gives corporations a veto."

Phil Schiliro is leaving the administration, reports Mike Allen: "Philip M. Schiliro, an architect of President Barack’s Obama’s legislative triumphs on health reform and Wall Street reform, will leave the White House at the end of the year, and will explore opportunities outside government, administration officials said. Currently assistant to the president and special adviser, Schiliro was named director of legislative affairs - the White House’s chief liaison to Congress, during Obama’s transition, and served in that role for the first two years of his presidency...Schiliro, who was a senior adviser to Obama’s presidential campaign, worked on Capitol Hill for 27 years - most of them as chief of staff to Rep. Henry Waxman (D-Calif.) and the House Oversight Committee, where he helped map the eight-year fight that culminated in passage of the Clean Air Act."

Stupid baby tricks interlude: A two-year-old freestyle raps.

Energy

A panel wants BP's oil spill fines going to Gulf renewal, reports Leslie Kaufman: "A Gulf Coast task force appointed by President Obama recommended on Monday that a 'significant portion' of the billions of dollars in fines that BP is expected to pay for last year’s Deepwater Horizon oil spill go to ecological restoration. Issuing its final recommendations, the federal-state task force said that a permanent panel should be created to champion and coordinate actions like limiting excess nutrients flowing into the Gulf of Mexico from farm states along the Mississippi. It recommended that river engineers put freshwater and sediment flows on an equal footing with issues like flood control. The recommendations of the task force, which was created by Mr. Obama in the aftermath of the oil-well blowout in 2010, were similar to those in a draft report it issued in October and are not binding."

Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.