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Analysis
Blame game on EMU goes into extra time

Blame game on EMU goes into extra time

French stick to deficit targets for now
Dutch elections add to EMU uncertainty

by David Marsh

Mon 20 Aug 2012

The long-running blame game on economic and monetary union (EMU) goes into extra time this week. Antonis Samaras, the Greek prime minister, will find out whether Athens is being made the ultimate fall guy for EMU’s travails when he meets a succession of European leaders including German Chancellor Angela Merkel.

When Samaras goes to Berlin on Friday to meet Merkel, he will be told Berlin remains implacably opposed to more money or more time for Greece to realise its impossible-to-meet targets on austerity and debt. But the reality may turn out to be slightly different, especially if Samaras receives a more nuanced message when he sees Jean-Claude Juncker, the Luxembourg prime minister and head of the Eurogroup of finance ministers, in Athens, and then President François Hollande in Paris on Saturday.

Merkel is straddling a thin line between backing Germany’s traditional stability-orientated principles while avoiding being branded as the woman who ended Greece’s heady and ultimately luckless experiment to fix its exchange rate against Europe’s best economy. Her aim is to succeed at both. But the pressure is rising all around.

The Dutch elections on 12 September – the day the German Constitutional Court is to give a provisional judgment on the legality of the permanent ESM rescue fund – could be a fateful date. The Dutch Socialist party, which takes a nationalistic line on EMU and a left-of-centre view opposing austerity and budget cuts, looks set to become the main force in the Dutch parliament, which could deprive Merkel of a traditional ally on economic orthodoxy just when she needs it most.

Meanwhile, France is sticking (for now at least) to its unpopular budgetary cuts – on the grounds that maintaining only a moderate ‘spread’ for French state bonds over German yields is the best way to maintain leverage over Berlin in EMU bargaining. Pierre Moscovici, the French finance minister, said over the weekend debt cuts are ‘imperative to conserving our sovereignty and staying master of our own destiny.’ This is strikingly similar to the justification put forward in 2004-05 by the German Social Democrats for their own unpopular programme of market-orientated reforms. The only problem is that the French Socialists have left it rather late.

One reason why Merkel’s dual strategy looks likely to pay off – at least for the next few weeks – is because the German economy is faring much better than expected even a short time ago. The relatively healthy economic backdrop means Merkel is starting the campaign for the German general election in just over 12 months as a clear favourite over the Opposition Social Democratic Party. This gives her more options to wrong-foot her political rivals and dodge criticism over the euro’s difficulties.

A range of centre-right German politicians and business people, all with Merkel’s tacit assent, has lined up calling for Greece to leave the euro if it fails once again to meet creditors’ economic targets. The consensus of the German governing class is now moving to the view that a Greek departure – voluntary and regrettable, of course – would open up the way for higher firewalls and more solidarity to shore up the countries which count, Spain and Italy.

Greece, though, is seeking exactly the opposite – to maintain flows of money through continued single currency membership. Athens wishes to raise fears that, if it were sacrificed on the altar of the euro, Armageddon-like doom would descend on Europe and the world. That’s a threat that, to German ears, rings more than a little hollow. Merkel’s line of talking tough and making concessions only if debtor states show plentiful capacity for contrition and suffering has so far won support and sympathy from German voters. So there’s no reason to think that she will change her tune.

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