Don’t blame alone the Germans for the euro’s woes
Since December 2012, the European Central Bank (ECB) has provided over one trillion euros, or 1.3 trillion US dollars, in liquidity to European banks. This money has mostly been used to purchase state bonds from the crisis-stricken countries of southern Europe. Economists are highly divided on the issue of whether this indirect fi nancing of chronically debt-ridden states by the ECB is the right medicine to fi x what ails the slowgrowing economies in southern Europe. Many commentators in the United States and Great Britain, however, had called for the deployment of this monetarypolicy bazooka. It is especially noteworthy that the president of the ECB, the Italian Mario Draghi, combined massive loans with a hefty dose of demagoguery. He suggested, for instance, that he preferred to think of Frankfurt’s money cannon as an even more powerful than a bazooka.
To him, it is the Central Bank’s “Big Bertha.” “Big Bertha” was the nickname for a 42-centimeter artillery weapon used by the German Reich during World War I to bomb French forts, and eventually Paris, without success. Big Bertha was used for the last time in 1944 to crush the desperate Polish uprising in Warsaw.
It is staggering to see how casually such metaphors are thrown about in the political debate about the euro. Before Draghi, the Greek and even the Italian media portrayed Angela Merkel as a girl in a Nazi uniform or as a tank driver taking aim with her cannon at the helpless Greeks. Germany – the destructive hegemon of Europe! That is the old and true history, but it has been misappropriated to distort the facts in this case. It is wrong, and it is insulting, because the Germans have shouldered enormous burdens to defend the euro. According to calculations by the Ifo Institute in Munich, Germany is guaranteeing 675 billion euros of the euro zone fi nancial assistance. On top of that, there are the 277 billion euros for the so-called target balances, a type of short-term loan that the German Central Bank, the Bundesbank, is providing to Portugal, Ireland and Greece.
A grandiose symbolic project
Germany is on the hook for about one-third of the entire sum of guarantee commitments for the euro bailout, which also corresponds to Germany’s relative economic weight within Europe. Due to its economic strength, Germany has found itself in a leadership role. That is not what it had intended. After the war, the Federal Republic of Germany under its fi rst chancellor, Konrad Adenauer (1949-1963), was grateful to be re-accepted into the community of democratic nations. This kind of restraint and a principally pro- European paradigm remained constant through governments of varying political stripes, including the government of Angela Merkel. The fi rst aim of the euro’s designers was not fi nancial, but political – its creators hoped it would make European unity irreversible. At the same time, it was a grandiose symbolic project that was meant to make “Europe” a recognizable and tangible experience in the daily lives of citizens. Unfortunately, the euro has a design fl aw: in pursuit of a political goal, countries of varying economic strength were locked into a common currency. Economists call this a “sub-optimal monetary zone” in which political and economic realities are confl ated – and end up in a confl ict. The reason: once they are locked into a common currency, weaker economies no longer have the option of reestablishing their competitiveness on the global and European markets by devaluing their own currency. This decline in competitiveness was concealed for the last 10 years by the fact that enormous state and trade defi cits were propped up with loans from the global fi nancial markets. Now that the fi nancial markets are no longer willing to extend limitless credit, this loophole is closed. One way indebted countries can now re-establish their competitiveness is to take action internally, by reducing wages, social security benefi ts, or state expenditures. The other way is to secure current account defi cits or budget defi cits through transfer payments from northern European states and obtain loan guarantees from them.
Thus far, Europe has pursued the path of transfers and guarantees. Internal competitiveness has hardly improved at all. Sustained mass protest in Greece is the writing on the wall for what will happen when the standard of living people have become accustomed to must be dramatically reduced. Up until now, as the largest donor country, Germany has tried to buy time for reform in the southern states by contributing to the fi nancial assistance granted. The equation of German politicians with Nazis is nothing more than the attempt by some Greeks and Italians to extort additional aid from Germany or to forestall or at least delay enacting reforms of their own. In other words, Germany is being made responsible because it has linked its aid to conditions requiring economic reforms – as it must do if it wants to secure the continued existence of the monetary union. That hasn’t stopped critics from pinning the blame on Germany for the foreseeable failure of this policy of stalling, dragging out and blocking the reform in Greece, which might be impossible anyway, and the inevitable departure of Greece from the euro area. Some even use it as an argument for extracting further unconditional aid from Germany for Italy and Portugal.
Greater than the euro
This puts Angela Merkel in a diffi cult situation. She must rely on a de facto coalition of all parties in the German parliament on this issue. Eighty-six percent of members of parliament voted for the latest aid package. At the same time, however, Ms. Merkel is under fire from the Federal Constitutional Court (Bundesverfassungsgericht) for the aid measures that were not approved by parliament, thus abrogating parliament’s prerogatives. Public support for her policies is also waning as the fruitlessness of the aid becomes apparent.
Ms. Merkel is in this jam partly due to her own actions. Her guiding political motto is: “If the euro fails, then Europe fails.” She would consider it a failure if even a single member left the monetary union. Thus, she has ruled out one potential solution to the crisis and pegged her fortunes to the willingness of Greek elites to enact reforms (more or less) voluntarily. The conditio sine qua non of Merkel’s policy is that a Greek exit from the euro zone is unacceptable. With this, Merkel has made herself a hostage to her own understanding of Europe, one which merits critical discussion. Only 17 of the 27 member states of the European Union are members of the monetary union.
Some important EU member states, such as Great Britain or Sweden, do not belong to it. Neither the euro nor the European Union would be endangered in any way if only 16 or even 15 states shared a common currency. Europe is greater than just the euro. In fact, it is greater than the European Union, which includes neither Norway nor Switzerland nor countries like the Ukraine or Georgia.
The aggressive tone that has entered the discussion of the euro-crisis shows that the euro is actually becoming a burden on the peace project that is Europe. Equating Europe and the euro leads to a situation in which passionate defenders of Europe who point out mistakes in the structure of the euro are stigmatized and forced into an opposition role just when Europe needs all the friends it can get.
Roland Tichy was a member of the planning staff of the Federal Chancellery.
He is Editor in Chief of “Wirtschaftswoche” and one of the most respected economic journalists in Germany.