Germany and other northern creditor states are on a potentially hazardous course. They are failing to acknowledge the depth of feeling within the euro area about the perceived inequities of economic and monetary union in Europe.
EMU seems, on a superficial level, to be working well. Recovery is well advanced across the 19-nation bloc, thanks to easy money from the European Central Bank, belt-tightening and reforms in the previously crisis-hit periphery, and a generally favourable world economic environment.
But beneath the surface troubles are brewing, underlined by the swing to the eurosceptic right in Italy’s election six weeks ago. There is still no new government to stabilise the most potentially troublesome euro area member.
Signs are multiplying of a policy split between EMU’s pivotal members, France and Germany. Monetary union has been transformed from a system of solidarity into a mechanism for perceived mutual victimisation.
Senior French officials talk openly about France being run by German economic orthodoxists. And leading German representatives lament that France, with its predilection for low interest rates and missed budget targets, rules the roost over far-too-loose monetary policy.
Beguiled into believing that the good times will last forever (not a typically Germanic trait), the Germans in general appear complacent about the gathering clouds.
At an OMFIF seminar in Paris this week, one German official – speaking about the Bundesbank’s non-interest-bearing €923bn lending to weaker EMU central banks under the Target-2 overdraft system – said that, with this level of implicit mutualisation, many Germans feel euro support efforts had gone far enough.
Another participant said Germany has benefited structurally from EMU, not only in being able to amass current account surpluses but also because of progressive specialisation of euro area manufacturing, which helped German industry unfairly. A German friend, learning of the comment but not knowing who made it, said this was a typical Anglo-Saxon misperception, reminiscent of a judgement from President Donald Trump.
In fact, the remarks (made on the record) stemmed from the doughty and hugely experienced Jacques de Larosière. The former managing director of the International Monetary Fund, Banque de France governor and European Bank for Reconstruction and Development president weighs his words with care. Frustration in Paris about perceived overconfidence on the German side (as well as among other northern EMU countries) points to a possible future turn for the worse.
A catalyst could come from a failure by Chancellor Angela Merkel and President Emmanuel Macron to devise ways for reinforcing EMU, for example through an enlarged European stability mechanism (which will not be turned into a monetary fund) or through enhanced supranational measures to stabilise European banks. Another trigger could come if other countries block German ideas on who should take the ECB presidency when Mario Draghi steps down in 18 months.
Merkel’s Christian Democrat/ Christian Social Union parliamentary grouping, in a newly inaugurated coalition with the Social Democrats, has strongly rebuked EMU-strengthening plans.
The CDU/CSU position paper in the last few days echoes the tilt towards eurosceptism seen in the ascent of the Alternative for Germany party as the formal Bundestag opposition. The CDU/CSU stance exposes the shortcomings of the Merkel coalition’s aims for an EMU institutional breakthrough – where Merkel has already been under pressure from the International Monetary Fund and the ECB executive board.
Germany’s critics should not be surprised. The writing has been on the wall for years. Take this quote from Gerhard Schröder, former German chancellor: ‘Now that Germany has gone through a difficult time, lowered its costs and has recovered competitiveness, the other countries have to do the same. There is no way that Germany is going to produce significantly more inflation to help out the others.’
Or former Bundesbank President Axel Weber’s prediction of ‘a move to Germany specialising in industrial activity, leaving other countries to be strong in services’. Or Merkel’s uncompromising line: ‘The rules will be geared not to the weakest states but to the strongest states. I know that this is a tough message, but economically it is an absolute must.’
These remarks may appear familiar. They were all made around a decade ago.
Germany believes it is following the correct prescription for bringing monetary union to health. German representatives will carry on until proof emerges that these policies are right. The problem is that circumstances may arise to demonstrate the opposite.
David Marsh is Chairman of OMFIF.