German calm belies vibrant eurozone debate

Posted on May 31, 2012

We have been here before: the eurozone equivalent of Groundhog Day. Alarm is gripping European financial markets, borrowing costs are rising for the countries of the periphery, and one is in the spotlight.

This time it is Spain.

    Most of the remedies under discussion involve recapitalising Spanish banks with European money, if possible without imposing further austerity on the Spanish economy.

    The one place where very little is being said publicly, however, is the country whose approval as principal financier is essential to making any such deal work: Germany.

    The official line is clear: “We are confident the Spanish government can deal with the problem. The measures it has taken so far have been sensible. We believe them when they say they do not need European money.”

    If they do need help, however, Berlin says the tools are available: Madrid can borrow from the European Financial Stability Facility, the temporary eurozone rescue fund set up in 2010, or the European Stability Mechanism, its permanent replacement. But that means signing up to international supervision, and Spain is much too proud.

    The superficial view is that Germany is just being bloody-minded – again – forcing excessive austerity on its partners in exchange for its financial support. The reality is rather more complex.

    From Berlin’s point of view, there are at least four good short-term reasons for staying stumm: Thursday’s Irish referendum on the eurozone fiscal treaty; the re-run elections in Greece in June; parliamentary elections in France; and the financial markets. Unguarded German comments could have a negative impact on any of those.

    Under the surface, however, there is a more lively debate taking place in Germany about the way forward for the eurozone, and the future of the EU, than in any other member state. It is less doctrinaire and more radical than the outside world seems to realise.

    For a start, there is a broad consensus across the German political establishment, from Angela Merkel’s Christian Democratic Union on the right to the Social Democrats and Greens on the left, in favour of closer economic integration in the eurozone.

    Loosely defined as fiscal union, it certainly goes well beyond the present ill-enforced budget discipline. It would involve much more closely co-ordinated national budget strategies.

    Joschka Fischer, one-time revolutionary, Green party leader and former foreign minister, says the EU needs a clear vision to revive public confidence. At a meeting of the European Council on Foreign Relations in Berlin this week, he spelt out the challenge.

    “We are now very close to break-up,” he said. “Either we move ahead very fast, or we will go back to disintegrating. Will we share our wealth? Will we integrate our debt? Will we transfer our power to common institutions?”

    Germany is ready to put all those things on the negotiating table – in exchange for closer integration. The problem is that its partners in the eurozone – including France, Italy and Spain, the three most important – want to see the colour of the German cash first, and negotiate the integration later.

    Take jointly guaranteed eurozone bonds, for example. From Italy’s Mario Monti, to François Hollande, France’s new Socialist president, and Mariano Rajoy, Spanish prime minister, such a pooling of debt is seen as a vital step to restoring confidence in the sovereign bond markets.

    Ms Merkel does not say “no” to eurozone bonds. She says: “Not without treaty change.” The German constitutional court in Karlsruhe would never allow Germany’s sovereign guarantee to be given to its eurozone partners without them submitting to effective and centrally budgeted discipline.

    But does anyone else want it? The Pew Global Attitudes poll on Tuesday showed that Germany is the only European country (out of eight questioned) where a healthy majority (59 per cent) still thinks economic integration is a good thing. Poland is also positive. France, Italy and Greece are all strongly critical.

    The same poll indicated that Germany is the most respected country in Europe – everywhere except in Greece – and Ms Merkel is the most respected leader. It does not quite tally with headlines suggesting Ms Merkel is isolated and Berlin is seen as the big bully.

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