Once upon a time in Maastricht
How Helmut Kohl lost his Euro bet
by David Marsh
Thu 8 Dec 2011
How history repeats itself! On 9 December 1991, a summit meeting took place at Maastricht in the Netherlands to set the path towards the single currency - 20 years to the day before Friday’s meeting in Brussels designed to rescue it. The Maastricht session on economic and monetary union (EMU), which I covered as Europe Editor of the Financial Times, marked the high point of German Chancellor Helmut Kohl’s reputation and power. How do I know this? Because he lost a bet with me. An important one, on the introduction of the Euro into the UK. How can anyone, however mighty, recover from a setback like this? Mind you, he didn’t acknowledge he’d lost the wager until six years afterwards. More on this at the end of this article.
At the latest gathering of European leaders, Kohl’s Christian Democrat successor Angela Merkel appears at a low ebb, beset by pressures from all sides. In fact, she looks likely to get her way across the board. The German government’s has seen its hard-line approach over bailing out weaker states reinforced by the Standard & Poor’s warning on possible downgrades of Germany and other Triple A states. The credit rating agency’s admonition has strengthened the belief in Berlin that, like that moment in the Titanic film when everyone scrambles for the lifeboats, it’s every man (or woman) for himself.
If you want an appreciation of Merkel’s true views, shorn of any false sentimentality, then look at a speech given on 22 November in Berlin by Jens Weidmann, the new President of the Bundesbank and her former economic adviser. Weidmann spelled out exactly what has happened to EMU’s peripheral states. Their ‘many years of wrong developments’, he said, were caused by ‘home-made’ errors, principally failure to use initially lower interest rates to channel funds into productive investments. Instead they frittered away the post-EMU dividend on ‘disproportionate investment in private home-building, high government spending or private consumption.’ Exactly. Weidmann deserves a prize for plain speaking.
As the French say: The more things change, the more they stay the same. At Maastricht on 9 December 1991, a senior German official, Dietrich von Kyaw, told me that popular German worries about giving up the D-Mark made it imperative that Helmut Kohl secured agreement on bringing the new European Central Bank (ECB) to Frankfurt – to assure the public that, even if a European currency were introduced, the Germans would still be in control. ‘It’s a time bomb which could explode under Kohl,’ von Kyaw said. Two decades later, the bomb is still ticking, this time under Merkel.
Differences over the role of central banks, the degree of fiscal sovereignty to be sacrificed by member governments and the right way to promote competitiveness and growth have dogged Franco-German exchanges since the first steps towards EMU in the 1950s. Tampering with the complicated EMU edifice resembles an attempt to repair a complex, many-sided piece of machinery where every component influences in a different way every other element in the mechanism. Apparently benign, constructive action to improve the workings of one small cog in the machine produces a negative outcome elsewhere.
For example, Merkel made a major concession to France and the ECB on Monday in Paris when she said private sector bond-holders would no longer need to take losses on future euro area rescue packages. However, either the public sector would have to pick up a greater share of the bill – anathema to Merkel’s Berlin coalition. Or the trouble-torn states at the centre of the debt crisis would have to make still further efforts to pay back their loans in full. This would intensify the vicious circle of debt deflation in the peripheral countries, producing more austerity, more income losses, less tax revenue and ultimately fewer funds to repay debts.
The most serious issue concerns renegotiating the European treaties in the direction of closer fiscal union. France is insisting that changes be incorporated in an inter-governmental framework that could be insufficient to convince either the Germans or the ECB that governments are really living up to their responsibilities. Shifting treaty language towards much greater centralised control of budgets would be highly difficult to pass through referendums in key countries, particularly Ireland. Agreeing a treaty for all 27 EU members that would bring in enough centralisation to please the Germans but would still be flexible enough to win British support would be a near-impossible task. On the other hand, limiting a new treaty only to 17 EMU members could spark confrontation with Poland and Sweden, two intensely pro-European countries that wish eventually to join EMU.
Another element of déjà vu lies in the long-held French suspicion that a principal German motivation behind EMU was to boost German exports by securing a relatively low exchange rate, free from the threat of competitive European devaluations. Without the sovereign debt crisis, the euro would probably be worth around $1.60 - indicating that German and other creditor countries’ exports are benefiting from a euro that is perhaps 20% undervalued.
Which brings us back to my currency bet in Maastricht 20 years ago. Chancellor Kohl was convinced (like the convener of the summit, Ruud Lubbers, then Dutch prime minister) that the popularity and success of EMU would inevitably sweep the UK into the single currency. One background motivation for the German wish was to add to a currency buffer around Germany by preventing other countries from devaluing and hampering German competitiveness.
Helmut Kohl told a late-night press conference on 9 December 1991 that Britain would join by 1997. I was there and I argued with him afterwards that this would not be the case. After some verbal sparring, we agreed a wager: six bottles of English against six bottles of German wine. Following a gentle reminder, the chancellor invited me to his office to share a glass with him and generously paid out the full bet in 1997. Six bottles, all signed by him. Two decades on, I have one bottle of wine left: Vintage 1995, Gimmeldinger Meerspinne. It’s of historical value, but (of course) it’s corked. If you were ungenerous, you might say the same about the euro.
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