20 September 2011
Merkel and Sarkozy did not save the peripheral countries, they saved their banking structures
The political price was heavy for the German Free Democratic Party, which urged people a couple of days prior to the state election, in Berlin on September 18, to "think openly" about an "orderly Greek insolvency". Berliner voters rejected the anti-European gamble of FDP chairman and Economics Minister Philipp Rösler and sent the party to its worst election results of the year– with just 1.9 per cent of the vote. The FDP failed for the third time, in 2011, to gain the 5 per cent hurdle to enter state parliament. Having already dropped to around 2 per cent in the elections in Bremen and Mecklenburg –Vorpommern in May and September this year, the FDP tried to gamble on the strong feelings of German voters against any further bail-outs of indebted peripheral countries.
This latest populist sound bite was floated at a time when the very difficult negotiations of the troika - the European Central Bank, the European Commission, and the International Monetary Fund - to grant a second tranche for Greece from the rescue package, are ongoing. Rösler's comment caused widespread disbelief among international and national observers. Even the Chancellor Angela Merkel and Wolfgang Schäuble - the German Finance Minister - were forced to disavow such an idea from their coalition partner. Firing such an ill-conceived salvo not only unsettled the financial markets further, it also demonstrates that the German political class is split on how to resolve the euro crisis. At each new turn, the crisis gets bigger and more expensive.
Equally strange was the suggestion aired by the Energy Commissioner Günther Oettinger, a member of the conservative Christian Democratic Union in Germany, that the national flags of the euro debtor countries should be flown at half-mast in Brussels to make visible to all that these countries are in violation of the treaties. This pronouncement was met with disbelief among many members of the European Parliament across the political party spectrum. No less bizarre is the suggestion from the former head of the Federation of German Industries Hans-Olaf Henkel, who had joined in the unsuccessful legal challenge at the German Constitutional Court against the Greek bail-out, to create a new currency with selected members such as Austria, Finland, Germany and the Netherlands.
This would mean that the eurozone would be split in two with a new European central bank based on the former disciplinary mandate of the German Bundesbank. No longer would France, the most important country with Germany to push forward the European Union project, be part of the eurozone. Irrespective of whether such a proposal would make economic sense – politically, it is irresponsible to suggest such a division.
Finally, the resignation of the hardliner Jürgen Stark from ECB's executive board in the previous week - in response to the bank's unorthodox measures to provide liquidity - was surely the low point of the week. Already Axel Weber, the likely candidate to succeed Jean-Claude Trichet at the helm of the ECB, resigned as president of the German Bundesbank in the spring. An equally dire warning came from the new Bundesbank president and the former advisor to the chancellor Jens Weidmann, who blew into the same horn reminding the ECB that its bond purchases from southern European countries are risky and go beyond its mandate. In the end, the German tax payer would have to shoulder these debts.
This daily stream of anti-European cacophony from various members of political parties, echoed in the printed and televised media, was strongly reputed by Jean-Claude Trichet. He reminded the Germans that it was the ECB that reacted to the crisis as a fire extinguisher, since the eurozone political leaders were unable to agree on a common workable crisis resolution mechanism. That Germany had experienced a higher inflation rate under the Deutschmark regime than under the euro is never mentioned.
The tragic side of this political verbiage is that the German population is fed on this anti-euro cacophony believing that German taxpayers have already out paid huge sums of money to the peripheral countries. That most of the money is in loans or guarantees is hardly ever communicated to the angst-ridden population. Even serious journalists - such as Josef Joffe, who is editor of Die Zeit - write of a cultural gap. The cultural gap signifies the disciplined Germans on the one side, and the extravagant southern European states on the other.
No mention is made of the German and French banks, which made huge amounts of profits by using the current account surpluses to make speculative loans to peripheral countries. In fact, Merkel and Sarkozy did not save the peripheral countries, they saved their banking structures. What they should have done was not to provide loans to Ireland, Greece, Portugal and Spain - but endow their own banks with sufficient capital so that they could withstand a debt restructuring. This story is never told in Germany. As Martin Wolf from the Financial Times has reminded his readers, the financial system in the eurozone would not work if all would behave like Germans.
Professor Brigitte Young works at the University of Münster, in Germany