Struggle for Germany’s monetary soul

Mini-BoT debate reaches Berlin after G7 disarray

The struggle for Germany’s monetary soul is intensifying. The weekend trade row at the G7 summit of industrialised countries leaves the Germans under pressure from all sides, especially over the future of economic and monetary union.

France is launching a full-frontal campaign to persuade the Germans to strengthen EMU as a means of standing up to President Donald Trump’s trade bullying. Yet Germany also faces strong domestic warnings that political pressures from Paris, Rome and Madrid, combined with the effects of Britain’s European Union departure, could leave the country isolated within a Europe trying to expropriate German wealth.

There are some perilous cross-currents. Giuseppe Conte, the non-political Italian prime minister chosen by the ruling Five Star and League populists, sided with Trump in the G7 dispute over inviting Russia back to the group. On this form, Trump may soon join forces with Italian and French critics of Germany’s financial stance and large trade surplus, which could add to tensions in the euro area.

These problems were aired publicly at a weekend conference in Berlin of the German Foundation for Family Businesses, attended by some of the country’s most successful non-quoted companies. Bruno Le Maire, French finance minister, summed up France’s position on Germany, saying monetary union would survive only if it was turned into a full economic union. In a well-received 50-minute speech (in German) mixing praise, blandishment and admonition, he quoted Winston Churchill in a veiled threat to the Germans: ‘You must take change by the hand or else it will take you by the throat.’


EMU imbalances – underlined by the German trade surplus of €200bn and French deficit of €60bn last year – were difficult to sustain and weakened the euro, Le Maire said. Germany risked being ‘crushed’ between the US and China unless it chose European solidarity. With an eye on industrialists in the audience worried about US curbs on German car, steel and engineering exports, Le Maire stated that Trump and the US would respect not weakness but ‘robust defence of Europe’s trade and investment interests’.


In an incendiary rebuttal of the French view, Hans-Werner Sinn, ex-head of the Munich Ifo research institute and Germany’s best-known economist, told the same audience 24 hours later that France and Italy were chasing Germany’s money. President Emmanuel Macron wished to change the European treaties and make EMU a transfer union.

Warning that Germany after the UK left the EU would lose power against protection-minded

Mediterranean countries, Sinn assailed the EU’s banking union deposit insurance scheme as turning European banks into ‘casinos’.


The Italian government’s budget plans, combined with eventually higher interest rates, would drive Rome’s budget deficit to 12% of GDP, ‘completely impossible to finance’.


Reflecting Italy’s 38% competitiveness gap against Germany over two decades, Italy’s ‘implicit threat’ to Germany was ‘introduce a transfer union or we leave’, Sinn said. Paolo Savona, now Italy’s Europe minister, ‘has put forward a plan for state bankruptcy and a parallel currency. This is no longer part of official government policy. We may see a series of firm denials and then exit from the euro.’ The mechanism could be via ‘mini-BoTs’, low-denomination Italian treasury bills already popularised by some Rome government advisers, which could be used like banknotes. ‘Via the Target-2 [intra-central bank payment] mechanism they could also be used indirectly to buy goods in Germany and elsewhere in the world.’


Sinn claimed Savona’s strategy was the same as that of Yanis Varoufakis, former Greek finance minister, in 2015 to force Europe into agreeing a third bail-out pact for Greece. ‘However, because of the size of the Italian economy, Italy will not be able to blackmail Europe like this.’


Olaf Scholz, German finance minister, speaking before Le Maire, said any country that managed the ‘difficult feat’ of quitting EMU would have to repay its Target-2 balance – the first time a German finance minister has commented on Target-2 in this way, indicating how debate is hotting up.


Davis Marsh is Chairman of OMFIF.


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