A German Europe?
BSSB.BE http://www.iris-france.org 29.07.2015
Reports of a profound Franco-German rift over Greece are exaggerated. The rhetorical confrontation over the third Greek bailout rather tends to hide the reality of the current situation, in which Eurozone governments are unwilling to challenge Germany’s management in-depth.
While the German government is being criticised for its tough tactics and the harsh austerity measures that it is imposing upon Greece, a number of national governments are increasingly wary that Germany’s stance might publicly appear to be anti-euro, thereby hindering their own political mantra — which centres on convergence towards a particular view of the German economic model.
The notion of a single European currency has mainly emerged in France within top administrative circles, which were desperate to find a new direction for European integration — an idea that would allegedly favour stability, increase Europe’s prestige and, most importantly, spur further convergence towards Germany.
In the aftermath of the Bretton Woods system’s collapse in the early 1970’s, European governments struggled to stabilise their exchange rates. Meanwhile, the constant game of exchange rate adjustment was felt as a humiliation by those governments that had to manage weaker currencies.
Alignment with the deutschemark then began to be regarded as the ultimate goal of economic policy-making. An entire intellectual corpus emerged, which consisted in establishing the conditions for rapid monetary convergence.
The economic cost of that convergence process was never properly appraised, although it would rapidly spiral out of control. Italy is a good example of that trend, as its stock of public debt surged (and nearly doubled) in the 1980’s and 1990’s while the Banca d’Italia set sky-high interest rates in order to combat inflation and stabilise the lira’s exchange rate versus the mark — pushing long-term interest rates and Italy’s debt burden upwards as a result.
The break-up of the exchange rate mechanism (ERM) in 1992-93 was the result of the Bundesbank’s insistence on combating inflation upsurges, which were stemming from Germany’s reunification process, regardless of the situation in countries such as Britain, which were facing recession and could hardly afford to defend their exchange rate through interest rate hikes. That, however, did not alter the mood among most European policy circles.
The Banque de France managed to stick to its strong franc policy, throwing France’s manufacturing sector onto a deflationary path that never ended, while the likes of Italy and Britain experienced massive depreciation. This experience, which was perceived as humiliating, would irremediably keep the United Kingdom away from joining the currency union.
Meanwhile, most other European governments, notably in Italy, failed to identify the beneficial effects of the post-ERM depreciation and later welcomed the single currency as a means to preclude any new “monetary humiliation.”
In many respects, the single currency is older than it seems, as its sociological roots date back to the “snake in the tunnel” in the 1970’s. As such, the process of monetary unification has shaped two generations of political party cadres and technocrats in Western Europe.
The euro’s management is often described as obscure and explosive by most commentators in other parts of the world, who are prone to believe that a trend of fierce opposition should eventually arise among Eurozone national governments over rescue programmes that are doomed to failure.
This dynamic does not seem to have materialised so far, even when the likes of Alexis Tsipras have been elected by a desperate electorate. It should be remembered that the Greek Prime Minister sent what amounted to a capitulation letter to Eurozone authorities on 30th June, five days ahead of the national referendum over bailout measures.
Mr Tsipras certainly never had the intention to reject a fresh austerity programme and was looking for a way to galvanise the Greek public while sticking to the Byzantine rules of the European game. His overall strategy went tragic when it led to bank closures, capital controls and an economic standstill, which will leave scars for years. Despite the current turmoil, Mr Tsipras is likely to have a bright future within the EU institutional system in the decades ahead.
On a different note, François Hollande was elected in 2012 on the pledge to renegotiate the so-called fiscal compact with Germany. At that time, the electoral promise was taken seriously although it was very unlikely to be fulfilled and the then socialist candidate made no secret that he had no personal reluctance towards austerity.
More recently, the French President fiercely opposed any idea of a Grexit at a time when his approval would have been needed had Angela Merkel decided to put that solution forward.
This however does not mean that the French government opposes Germany’s management of the Eurozone. Quite the contrary, the French government would like Germany to embody an even stronger leadership, but one that would be indisputably compatible with the preservation of the Eurozone, at any cost. In this respect, France’s stance is very stable, along the political line that was previously dubbed “Merkozy.”
There was a palpable sense of embarrassment in France and other Eurozone countries, in recent months, when Germany appeared increasingly tired of devising a political plan to keep Greece in the euro and willing to subordinate the euro’s preservation to national political issues. Meanwhile, given the widespread unease with the German government’s tough methods, most Eurozone governments have felt the need to distance themselves from Germany, on the rhetorical front.
An example of this includes the restructuring issue. No one among Europe’s politicians believes that the Greek debt could be made sustainable long-term without a massive adjustment. Germany insists on limiting restructuring to so-called reprofiling techniques (extending maturities and lowering interest payments further), and sticks to its decision to preclude any outright write-down, although that kind of relief is badly needed.
While other European governments, inspired by the International Monetary Fund, are now pressing for a restructuring, they too increasingly favour a mild one, under the shape of a reprofiling. Oddly, several political leaders implied that they were contending with Germany on that issue although they were obviously in sync with the Chancellor. This contradictory mix of alignment with the German government and rhetorical bravado causes unhealthy confusion.
François Hollande pledged, in his traditional 14th of July interview, to promote the ideas of Eurozone economic governance – notably with the creation of a parliament – and fiscal convergence with Germany. Far from a confrontational approach, this leaves little doubt as to his vision for the Eurozone.
Nonetheless, his commitment actually makes the situation even more difficult to grasp as a German Eurozone is not necessarily appealing to most Germans. Germany, under the leadership of Gerhard Schröder and Angela Merkel, has developed a largely national perspective on policy-making, particularly on economic matters.
The Euro has undoubtedly been used by Germany in order to rebuild its massive trade surplus through wage moderation policies in the 2000’s, thus offsetting the effects of reunification a decade earlier.
Meanwhile, a lasting trade surplus close to 7% of gross domestic product (GDP) is pointless, even in the eyes of the most conservative economists and policy-makers. Admittedly, when listening to Wolfgang Schäuble, one could think that German political leaders aim at achieving a Germanised Europe.
Although it might sound surprising to those little accustomed to German politics, the finance Minister is actually a European federalist, and as such belongs to a minority within the German right. Mr Schäuble does have a vision for Europe — that of a currency union tightly supervised by his country according to German standards made European law.
Mrs Merkel’s mindset is certainly more in line with the general public. Although the finance minister’s tough legalistic style makes him highly popular in Germany – even more so than the Chancellor – his particular kind of pro-European beliefs are shared by few in his home country, especially within his own political family.
The notion of a German leadership for Europe is at odds with post war trends, when Konrad Adenauer founded the Christian Democratic Union (CDU). A Rhineland Catholic, he successfully reached out to conservative Protestant politicians in order to create a political movement that aimed at westernising Germany for good and putting an end to his country’s “special path” (Sonderweg) .
While the widespread reference to the Third Reich, when judging the German government’s stance, is pointless, the implicit insistence on the part of other European governments that Germany should take the economic lead – while opting for a slightly more conciliatory style – has been derailing the historical process of European normalisation for four decades.
Germany, like any other European nation, should not be expected to rule over the Eurozone but to simply manage its own economy – precisely what a majority of Germans want – in a cooperative manner. Conversely, no excessive austerity measures should have ever been imposed upon any Greek government in exchange for bailout funds.
The current political status quo that consists in implementing depressionary bailout programmes while maintaining the Eurozone in its current form is noxious. European politics will have to move towards decisive choices.
Author: Rémi Bourgeot, Economist, Expert on the Eurozone and emerging market