The role of Germany redefined?Wolfgang Proissl

Cape Sounion, June 11, 2010

Germany – Europe‘s anchor once again

Despite EU integration and EMU Germany once again has become Europe‘s benchmark on all economic and fiscal issues.

A few recent examples besides German bunds: constitutional debt limitation, this week’s consolidation package

The other countries are under enormous market pressure to adopt German style responses to the the debt crisis

Even France is forced to follow and think about a debt limit in its constitution and a consolidation package - despite Sarkozy‘s fear of angering voters before reelection in 2012

French PM Fillon: „The first thing I look at every morning is the spread differential between France and Germany“.

Le Monde, June 8, 2010

Germany’s refusal of leadership in the EU

Germany‘s weight and its crucial role in designing EMU implied leadership in the crisis and post crisis management.

However neither the previous nor the present government is in any mood to exercice that leadership.

There has been a creeping disenchantment with Europe well before Merkel. Already in the end of the Kohl era und during the Schröder/Fischer years efforts to contain the EU (subsidiarity, net payer‘s „1-%-club“) clearly appeared.

However the break is the clearest with Merkel‘s accession in 2005. She is interested in efficient day-to-day management (e.g. German EU presidency), nothing beyond. It is no small irony that – against her will – she is now de facto the boss on the drawing board for redesigning the failed EMU I project.

Merkel’s problem: a tectonic shift in public opinion

General attitudes in parts of the press and public opinion toward the EU have shifted dramatically in the last decade.

In 1999 chancellor Schröder felt under huge domestic pressure to accept an EU budget on very unfavorable terms for Germany. He just simply could to be seen as less European by the German public than his predecessor Kohl.

In the beginning of the Greek crisis Merkel scored points for being tough. When the chancellor took an uncompromising line on Greece despite isolation in the EU she was praised by mass circulation daily “Bild”.

“Never again Europe’s paymaster”, the headline ran, showing Merkel in a Bismarck style statute as the “iron chancellor”.

Bild, March 25, 2010

Merkel was totally unprepared for the crisis

For Merkel EU integration had reached an optimum with the Lisbon treaty. With national unity achieved, the internal market in place, monetary union according to German design, enlargement and an increase of the country‘s weight in the EU institutions Germany had reached its strategic aims in Europe.

The legalistic and static culture of German policy making, her distaste for improvisation and her systematic way of doing politics - a bit like she did physics and chemistry before politics - left her ill equipped for a dynamic crisis situation.

In a speech in June 2009 she stressed she would focus on implementation of the existing EU laws, containing the EU institution‘s eternal appetite for more competences, protecting the status quo favorable to Germany and abstain from formulating any vision for the future or the finality of Europe.

Strict limits of the Karlsruhe court

The Constitutional court‘s 2009 ruling on the Lisbon treaty considerably limits the government‘s room of manoeuver. It has created a constant fear in government of being legally challenged. German EU policy has become highly defensiv.

The Maastricht ruling of 1993 is directly relevant to the Greek and the Euro rescue packages. It de facto creates an eternety clause for the EMU‘s stability culture and implies that Germany could leave EMU once this culture no longer applies.

The court rulings were immensely important in Merkel‘s handling of the Greece crisis. One could almost say she needed the risk of a systemic meltdown of the eurozone as was the case on the weekend of May 7 to 9 in order to feel safe her line would hold in new trial at Karlsruhe.

Delegitimization of EMU in Germany

The gouvernments handling of the crisis was a PR desaster for the reputation of EMU in Germany.

The mix of reality denial, tactical waiting because of the federal state elections in Nordrhein-Westfalen, occasionally justified tough lines, conflicts within the government between Merkel and finance minister Wolfgang Schäuble discredited both the government‘s action in the crisis and EMU.

Coverage in parts of the press and comments of leading German EMU protogonists reenforced all fears and prejudices many Germans had held prior to the Euro‘s introduction.

Inflation worries and fears about the security of saving accounts in Euros reappeared.

„The Euro Lie“, „Euroland has burnt down“

The day EMU I ended (May 7 and 9)

After the Brussels meeting of the heads of state and government of the Eurozone Sarkozy stood up in front of a carefully staged setting of the 16 Euro-flags and claimed that „95 %“ of the French ideas had been adopted that night.

A visibly shaken Merkel left the meeting through the back entrance telling reporters en passant the decisions had been neccessary to fight of a „systemic crisis“ for the euro.

A few days later French Europe minister Pierre Lellouche commented the decisions amounted to a „treaty change“ and where the EU‘s economic equivalent to Nato‘s Article 5.

Most Germans think Sarkozy and Lellouche are right. They see the decisions as the end of EMU with its stability culture, the independence of the ECB and no monetizing of public debt.

Comments by German Euro Protagonists

Karl Otto Pöhl, president of the Bundesbank 1980-91: „The basis of the Euro has fundamentally changed since the governments of the Eurozone have decided a mutual bail-out association. … You will see how much we Germans will have to pay for all this.“ (Spiegel, May 17, 2010)

Axel Weber, president of the Bundesbank on the ECB‘s decision to buy government bonds: „Buying bonds contains considerable stability policy risks and therefor I am critical of this decision by the ECB council even in this extraordinary situation.“ (Börsen-Zeitung, May 11, 2010)

Josef Ackermann, CEO of Deutsche Bank: „I doubt that Greece over time will be able to make that effort (to pay back its debt).“ (ZDF television talk show, May 13, 2010)

Good news: Germany is getting reengaged

Despite the perceived defeat the German government is reclaiming ownership for the EMU I‘s framework and is engaging constructively – example: Schäuble‘s 9 points for Van Rompuy‘s task force.

The relationship Merkel – Sarkozy is as bad as it is. But there are small signs of progress. Merkel has embraced the concept of economic gouvernment as long as it is the EU 27. Compromise may be within reach with Sarkozy‘s insistence that it is the Euro 16.

Merkel and Sarkozy probably understand: There is no long term gain possible in fighting each other. Despite all the differences and bad feeling they are condemned to cooperate.

Risks: dissident mood and a German Le Pen

Since her reelection Merkel in fall 2009 has been an exceptionally weak leader domestically and in Europe. Sie has allowed euroskepticism, chauvinism and hostility towards the EU to become the dominant force in the German debate on Europe and the Euro.

For the first time a dissident mood towards the EU has taken root in Germany spectacularily expressed by Bundesbank president Axel Weber.

The governments (in)action has created a political space that could be exploited by a charismatic German anti EU populist like Jean Marie Le Pen or Geert Wilders.

All main stream parties, but particularily the center of the right parties CDU, CSU and FDP will tempted by anti EU and anti Euro campaigns in the next elections.

FT, May 28, 2010