Germany’s reputation for reliability on the line as Greek bailout agreed
by David Marsh
Tue 4 May 2010
One of the main motivations behind economic and monetary union (EMU) in Europe was to enshrine reunified Germany as a reliable and credible partner for the rest of the Old Continent. By giving up the D-Mark for the euro and subsuming the Bundesbank into the European Central Bank, so the story went, the newly reforged German state would demonstrate that, despite its greater size and population, that it was every bit as communautaire as the old Federal Republic spawned during the Cold War division of Europe.
The last couple of weeks have, however, created the opposite impression. Never mind that Georges Papandreou, the Greek prime minister, with his churlish talk of protecting his country's sovereignty from the forces of conservatism, has hardly been winning bonus points as a man entitled to receive money from the taxpayers of northern Europe. By dragging her feet on aid for Greece and appearing to suggest that the future of her Christian Democratic Union conservative party in the important state election next week in North Rhine-Westphalia is more important than the future of the euro, Chancellor Angela Merkel has been playing with fire.
(missing picture of Angela Merkel)
German Chancellor Angela Merkel is playing with political fire.
The rising tide of monetary catastrophe that could engulf Greece and other southern states has threatened to deal a fatal blow to the image of Germany as a progressive and supportive lynchpin of Europe. The combined forces of European political reason, led by two Frenchmen, Jean-Claude Trichet of the European Central Bank and Dominique Strauss-Kahn of the International Monetary Fund, both in flying visits to Berlin last week, have been brought to bear to persuade Germany that Greece and other peripheral states are worth saving. Merkel and Wolfgang Schaeuble, the finance minister, now appear to accept that argument on the basis of a naked appeal to self-interest.
If the peripheral states are forced into debt restructuring or to leave the euro, the German government now recognises that the stability of the euro as a whole will suffer. That desire to look after the wider euro construct may be enough to tide over the battered project of EMU for another few weeks. Whether the cohesion of the single currency has been granted more than simply a breathing space is far from clear.
Under attack, too, is a particularly Germanic form of political correctness. In 1998, when the fateful decision was made to go ahead with EMU with a mixture of traditionally stable northern states and a collection of less solid but fervently aspirational southern states, most ordinary Germans, particularly those, like Merkel, who had been brought up in the old East Germany, were deeply suspicious of giving up the D-Mark and replacing it with the euro. So were many academic economists.
However, big business, the banks and all the mainstream political parties were in favor of going ahead. After the Bundesbank said that the project was "acceptable" from the point of view of monetary stability, in April 1998 Germany's two houses of parliament voted through the euro with only minimal opposition. Now, the German-in-the-street is making up for lost time. Popular antagonism against public funding for struggling euro members makes Merkel highly cautious on emergency aid for Greece.
There is an air of déjà-vu. Wilhelm Hankel, Wilhelm Nölling, Karl-Albrecht Schachtschneider and Joachim Starbatty, four German professors who launched an anti-euro lawsuit at the constitutional court in 1998, are preparing fresh legal action. Then, Wolfgang Schäuble, in 1998 Chancellor Helmut Kohl's main political lieutenant, dismissed the plaintiffs' chances. Now, there is a much greater likelihood of success for the professors' claims of infringements to the EMU rules, in particular over the "no-bail-out clause" preventing joint payment of weaker states' debts.
Schäuble, meanwhile, is German finance minister. When Kohl accomplished German unification in 1990, he repeated Chancellor Otto von Bismarck's phrase when Germany was first unified in 1871 that the coattails of history were brushing his side. Two decades later, in defining their reticence over Greek debt, Merkel and Schäuble feel the restrictive hand of the constitutional court at their shoulders.
As Greece approaches a possible debt restructuring and even a euro exit, questions are due why warning signals went ignored that weaker EMU countries were building up unsustainable borrowings.
In technical reports, the European Commission in the past two years, well before recent Greek budget deficit controversy, voiced worries about rapidly rising short-term external debt in Greece and Portugal caused by repeated large current account deficits resulting from sharply falling competitiveness.
Over a 10 year period, Greece's current account deficits add up to an astonishing and unprecedented annual average figure 9.7% of GDP, Portugal's to an only slightly less horrendous 9.2% and Spain's to 6.4%. For the worst offenders, the scale of the current account deficits over the past decade have been at least twice as large as those among Asian countries that led to the abandonment of the Asian currency pegs in the foreign exchange turbulence of 1997-98 . They have also persisted for at least twice as long. There was certainly no shortage of warning signals that trouble was brewing. Yet the commission's widely publicized, largely laudatory report on the euro's first decade, in May 2008, devoted only three paragraphs in 328 pages to current account imbalances. The document said in most countries "the ongoing adjustment" was "benign".
Jean-Claude Trichet has been caught off guard by the sudden worsening of the Greek imbroglio. When criticism of Greek accounting irregularities previously erupted in 2004-05, Trichet stated, "We must learn from past experience" to prevent recurrence. After latest news of Athens budgetary coverups, the ECB's image has been dented by admission that such efforts have failed.
Inadequate discussion of EMU's problems has been particularly acute over whether political union is needed to accompany monetary union. Both the Bundesbank and Kohl suggested in 1991 that without political union, EMU would eventually fail. In intervening years leading German figures softened their view. In 2006 Otmar Issing, the former Bundesbank chief economist who took this role at the ECB, said monetary union "can work and survive ... without fully-fledged political union." Now Issing says: "In the 1990s many economists -- I was among them -- warned that starting monetary union without having established a political union was putting the cart before the horse."
Leading German figures never explained that large deficits in countries like Greece would eventually impinge on Germany's own finances. Germany, the main surplus country, has inevitably become the largest creditor of the euro zone's heavily indebted peripheral nations. As Issing said in 1999, the "no-bail-out" clause was meant to prevent the "negative external effects of national misbehavior" from spilling over elsewhere. In fact, German tax payers will have to pay for Greece directly, through emergency government loans, or indirectly, through supporting German banks that will be hit by a Greek debt restructuring, or, conceivably, both. The perception that, one way or another, Germany will have to pay or the euro hardly adds to the project's popularity. Whatever happens, EMU's air of apparent invulnerability since the financial turmoil of 2007-2008 has been lost, probably irretrievably. The next few weeks could be very ugly.
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