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2013: A Year in the Crisis

15. January 2014, von Alexandre Abreu, Comments (0)

So here we are in 2014. As this edition of the Euro Crisis blog draws to a close, it is time to say farewell to the readers and greet the new contributors who will take over and comment on the Euro zone crisis as it develops from here on in. Farewells are also an appropriate time for stock-taking exercises, however, so I think it is appropriate to end my contribution by reviewing what the latest year has meant for the bigger picture of the Euro crisis – at least the way I see it. What progress has been made in the various fronts? And how much closer are we to a resolution of the crisis?

Perhaps not surprisingly, my views are considerably less optimistic than those of most other analysts, many of whom seem to consider that the worse of the crisis is largely behind us. I, on the contrary, believe that we are still far from hitting the bottom, let alone from a resolution. And I also believe that we end the year 2013 in a worse position that we started it.

First, take the superficial element of the crisis: the sovereign debt levels of the eurozone countries. (Superficial in the sense that, as I and many others have argued before, they are a consequence, not a cause, of the crisis.) Between the second quarter of 2012 and the same quarter of 2013 (the latest for which Eurostat has available comparable data), in a context of widespread austerity, absolute public debt levels increased in Austria, Belgium, Cyprus, Estonia, Finland, France, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Slovakia and Spain. That is to say, in every single eurozone country except for Germany and Latvia. As a percentage of GDP, government debt increased in all 18 eurozone countries except for Austria, Germany and Latvia – including to such remarkable levels as Greece’s 169%, Portugal’s 131%, Ireland’s 126% and Spain’s 92%. Not quite unexpected given the obviously recessive consequences of austerity, but certainly not a sign of progress towards a resolution: greater debt levels mean a greater burden constraining the possibility of counter-cyclical fiscal policy (particularly with the Fiscal Compact in place) and, at least in the Portuguese and Greek cases, a greater amount which will not, for it cannot, be repaid (whether this be through haircuts or sovereign defaults).

More significantly, though, the more fundamental economic variables which encapsulate the nature of the crisis have either deteriorated or remained unaltered during the course of 2013: the massively negative external debt, or international investment position, of the peripheral Euro zone countries (the ‘divergence’ component of the crisis) remained basically unaltered, save for some marginal improvement in the case of Ireland. As for the overall economic performance (the ‘stagnation’ element of the crisis), the outlook also continues to be profoundly depressing: annual GDP growth in the euro area as a whole in 2013 is estimated at -0.4%, while euro area unemployment remains at a record 12.1%. At the same time, the constraints weighing down on that performance have not alleviated: the deleveraging of the private (household and corporate) sector remains to be done, while the spectrum of deflation is an ever-more-present possibility, further worsening the debt overhang and giving rise to recessive debt-deflation dynamics.

At the political and institutional levels, we now have a Fiscal Compact in place which has basically banned counter-cyclical fiscal policy at a time when monetary policy has become well-nigh ineffective; a ‘banking union’ which has not broken the vicious links between troubled banks and troubled sovereigns; a minuscule EU budget slashing all hopes of a recovery led by counter-cyclical policy at the European level; unrelenting insistence on austerity as supposed way out; discontent with the European project growing steadily across the EU; the far right increasingly showing its ugly head as it takes advantage of the European leaders’ incapacity or unwillingness to address the real root causes of the crisis; and a full-fledged humanitarian crisis in large swathes of the European periphery. Hardly grounds for optimism.

Having said this, it is no doubt true that the eurozone crisis has changed its character during the course of 2013: in contrast to earlier on in the year, we no longer experience the crisis as a series of acute episodes, in which the possibility of a dénouement is just around the corner. Instead, we have entered a largely chronic stage, with neither collapse nor improvement in sight. A significant indicator in this respect consists of the interest rate levels on sovereign debt throughout the eurozone: even though the economic outlook has continued to worsen, interest rates, particularly in the eurozone periphery, have fallen significantly over the course of 2013, thus alleviating one of the most acute dimensions of the crisis. By and large a continuation of the ‘Draghi effect’ (the ECB’s manifest willingness to do whatever it takes to prevent defaults in the Euro zone, provided that austerity remains in place), but unintelligible without taking into account the extent to which resistance to austerity has so far failed to materialise at the political level (thus rendering this deleterious low-level political-economic equilibrium much more stable than it seemed 12 months ago).

But this equilibrium will not last, for austerity and deflation are exactly the key ingredients of permanent recession in our current debt overhang situation – and sooner or later the electorate, in at least one of the more chastised countries, will prefer default and the possibility of a euro exit, for all their risks, to the certainty of perpetual impoverishment. In 2013 the crisis turned into chronic stagnation, but we should not let ourselves be fooled by this apparent calm: it only takes one card to bring the house down.

May you have a happy 2014, dear reader – and in these times of crisis, may Europe and its peoples live up to the lofty democratic ideals which the continent has spawned throughout its history.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

US Treasury versus Germany: New Controversies, Old Debates

7. November 2013, von Alexandre Abreu, Comments (0)

You may have heard about the recent report by the US Treasury criticising Germany’s deflationary economic policies and their harmful effect on the global economy. And if so, you have probably also heard about the reaction that ensued on the part of the representatives of the German authorities, who retorted that there’s nothing wrong with Germany’s “growth-friendly economic and fiscal policy”. Indeed, according to the latter, Germany’s policies constitute a model to be copied by all, including in particular by deficit countries like the US.

My own contribution to this debate will consist of inviting the reader to travel back in time to the United Nations Monetary and Financial Conference which took place in Bretton Woods, New Hampshire, in July 1944. It was a watershed event, which lay the foundations of the global monetary and financial system for decades to come, including through the creation of such structures as the General Agreement on Tariffs and Trade, the International Bank for Reconstruction and Development (which would become the first of the World Bank Group institutions) and the International Monetary Fund. In addition to seeing the birth of what would become known as the ‘Bretton Woods institutions’, the Conference also became legendary in the field of economic history due to the debates between the British delegation, led by John Maynard Keynes, and the American delegation, led by Harry Dexter White. Both men would go down in history: Keynes as an intellectual giant and the ‘father of modern macroeconomics’, White for his ultimately victorious role at the Bretton Woods Conference, but in a strange twist a fate a few years later also due to having been exposed as a Soviet agent in the context of McCarthyism.

In any case, the crux of the disagreement between the British and American delegations concerned which mechanism should be put in place to govern the international financial system and, in particular, to deal with international imbalances. White’s proposal was the one which was ultimately adopted: a fixed-exchange-rate currency regime and the creation of the IMF, tasked with providing emergency financial assistance to countries faced with balance-of-payments crises, under the proviso that these countries adopt contractionary policies aimed at curbing their imbalances. By contrast, Keynes advocated the creation of an international clearing union and international unit of account (the “bancor”), and he wanted the burden of adjustment to be shared by deficit and surplus countries alike: deficit countries would be required to curb demand, but surplus countries would be required to use their surpluses to increase their demand for other countries’ exports. This was built on the acknowledgement that a country’s surplus is, by necessity, another country’s deficit – and on the idea that addressing international imbalances through forcing contractionary policies on one of the sides of the imbalance alone has an overall depressive effect on the global economy. By virtue of political economy (the strength of the creditors’ interests) rather than sensibility, the American proposal won – and that is why throughout the last few decades we have seen IMF delegations imposing austerity, privatisation and deregulation in crisis-ridden developing countries, instead of seeing them confiscate a share of China’s or Germany’s trade surpluses and injecting them back into global demand as Keynes would have had it.

So you see, this most recent of controversies has its roots in a debate that stretches well into the past. It’s not hard to see who’s on the side of reason here: Germany’s policies are not an example to be copied by all because, by definition, not every country in the world can be a surplus country; and its current account surpluses are not “a sign of the competitiveness of the German economy and global demand for quality products from Germany”, as the German authorities have sought to suggest, because, for any level of exports, Germany could have a balanced current account as long as it did not also have an excess of output over spending. The criticism by the US Treasury is therefore entirely to the point. However, it also comes tragically and ironically late: late by about 10 years if we consider the origins of Germany’s ‘wage restraint’ policies; late by about 70 years if we consider what the American delegation stood for at Bretton Woods, and what that meant for the functioning of the global economy in the decades that followed.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Taking a Close Look at the Grand Coalition Talks: not so Grand on Europe?

5. November 2013, von Almut Möller, Comments (0)

Berlin is heading towards a grand coalition between Chancellor Merkel’s CDU, her Bavarian sister party, the CSU, and the Social Democrats (SPD). After an election campaign in which European issues were strangely absent, surely the delegations that sat down a month after the elections had to get their teeth into Europe.

By putting Europe on the agenda of the coalition talks at an early stage of the negotiations, the delegations wanted to send out two messages: firstly, Europe matters and, secondly, Conservatives and Social Democrats are optimistic about shaping a joint agenda, so no need for the rest of Europe to worry about Berlin not getting its act together. Clearly, healing the eurozone is of vital interest for this country and one of the priorities laid out by Chancellor Merkel for the future government. However, what leaked out on the confidential discussions last week was not quite matching these ambitions.

To start with, it is, arguably, rather strange to see European affairs merely been dealt with in a subgroup (“banking regulation, Europe, Euro”) which is part of a larger working group on Finances and the Federal Budget headed by Finance Minister Wolfgang Schäuble and Olaf Scholz, First Mayor of the Free and Hanseatic City of Hamburg. A subgroup? Hardly a sign that Europe is prioritised despite the presence of prominent figures such as Martin Schulz and Markus Söder, the Finance Minister of Bavaria. One cannot resist the comparison with the Convention on the Future of Europe convened in 2002, which did not have a working group on “EU institutions” because the issues on the table were so controversial that they had to be dealt with across different working groups. On major issues such as pending decisions on banking union, the SPD’s debt redemption fund, or referendums on EU affairs put forward by the CSU, there was clear and open controversy. Are these really merely tactical moves by the SPD to keep an independent profile from the CDU, especially in the run-up to the European Parliament elections (with Martin Schulz to be nominated as the PES’s candidate for the presidency of the European Commission later this week)?

Not surprisingly, a working document of the discussions that was leaked by the Young European Federalists (JEF) provoked an outcry of Germany’s young pro-Europeans. Apart from a general commitment to the EU this short draft consists of an odd mix of buzzwords for CDU/CSU and SPD: the principle of subsidiarity, a strong role of member states in public services, an EU budget prioritising growth, employment and innovation and the already agreed financial transaction tax. It is unclear what stage of the negotiations it reflected when it was leaked, but the paper ridiculed what are meant to be serious discussions.

Public debate in Germany is currently all about the alleged tapping of Angela Merkel’s phone by US intelligence. At the same time, perhaps to the surprise of those looking at Germany from the outside, the public continues to be largely immune to the most recent wave of criticism from the US Treasury challenging Germany’s external trade surplus and the risk that arguably the German model poses to the healing of the eurozone. I am not suggesting that one has to agree with such allegations, and certainly any German government should respond to such criticism with good arguments.

What is worrying me, however, is that most Germans are still not aware that there is also an intra-European challenge regarding the ‘German model’, which for me is much more important than the Washington angle. At a crucial point for the future of the eurozone, Germans remain rather clueless about what is at stake. How long will it take for political leaders in Germany to prepare the public for the hard choices and for the sacrifices that Germany and other eurozone countries will have to make, to build the future for a prosperous and cohesive economic and monetary union? The German President Joachim Gauck was right to address this state of mind which almost resembles sleepwalking in his speech on German unification day in October:

“Our country is not an island. We should not cherish the illusion that we will be spared from political and economic, environmental and military conflicts if we do not contribute to solving them.”

The president lacks political clout, yet he is an accepted normative lighthouse across the country. But he remains a rather lonesome voice on this issue so far – and I doubt whether Germans listening to his speech actually understood the point that the president tried to make. The German public cannot be blamed for this wide-spread ignorance (or innocence?). Where are the politicians today who have the courage and wisdom to unchain the Europe debate?

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Parallel Currencies are no Alternative for the Euro

21. October 2013, von Adriaan Schout, Comments (0)

Many are upset about the ‘TINA-type solutions’ for the euro crisis. ‘There-is-no-alternative’ (TINA) seems to have been an irrevocable characteristic of the euro right from the start. A sense of ‘having been forced onto the people’ was kindled by the fact that in most countries the single currency was adopted without referenda. Subsequently, many of the measures including EFSF, ESM, disputable bail-outs of governments and banks by the ECB, sharpening up of the stability and growth pact and the 2pack (which forces Member States to hand in national budgets before being adopted in parliament) have all contributed to the image of the euro as extremely risky and as an undemocratic intrusion on national competences. On top of this, many countries struggle with the constraints of the dubious 3% rule. If economic governance is to work, Barroso in his blueprint has given a clear insight into what it involves, including an EU finance minister and EU bonds.

There is a sizeable group in the eurozone that does not want these TINA-type steps towards a federalised and centralised EU. Many would like to leave the EU straight away. Others, such as German Professor Kerber and adepts of The Matheo Solution, suggest to introduce types of parallel currencies or currency units (calculation currencies such as the ECU). According to Kerber, if southern states do not want to leave the euro zone, then the countries with a current account surplus should introduce their own currency. He suggests that since the relevant northern countries are only Germany, the Netherlands, Austria, Finland and possibly Luxembourg, the new currency might as well be the DM under the watchful eye of the Deutsche Bundesbank.

Hopes of a parallel currency immediately lead to serious questions (even if we ignore the political complications and impossibilities). Firstly, there are legal questions about breaking away from the eurozone. Will the Commission use all legal means to ensure the integrity of the eurozone? Secondly, one should not think lightly of the consequences for the competitiveness of the new DM block when the DM revaluates. Thirdly, a break-up would complicate the necessary steps towards the banking union even more and thwart the internal market at least in financial services. With bouts of devaluations, any banking resolution mechanism would be frail. However, most worryingly of all would be the fall back towards the ERM (European Exchange Rate Mechanism) days when especially southern countries had to devalue repeatedly. This had profound economic consequences including financial losses while structural changes continued to be stalled and spells of high unemployment because countries mostly postponed devaluations to ensure prestige. (B. Connolly (1994), The Rotten Heart of Europe, Faber and Faber.)

The changes for successful reforms in countries outside the euro framework are (decidedly) lower than within the eurozone. The best options for structural changes in expenditures, labour market reforms, tax reforms, deregulation, anti-corruption policies, rule of law measures, banking supervision, etc. are within the euro system. This will, in the long run also benefit the eurozone and EU more broadly.

Evidently, the costs of dealing with the current bubbles in the eurozone are huge. However, these costs in terms of ban risks and government deficits have already been committed and have been shifted to, among others, the balance of the ECB. They will not go away with a break-up of the euro. Inside or outside the euro, adaptations will remain expensive.

Of course, we can throw away all hope for reform in countries such as France, Italy and Greece. If we are so negative, we would better dismantle the euro as soon as possible. However, it would be in all our interests to ensure reforms. Changes seem to be taking place in and, in any case, prospects for reform are best within the eurozone (ask the Dutch).

Parallel currencies show at least that alternatives for the euro do exist but it seems wise to keep such disruptive alternatives at bay for the time being. Thoughts about parallel currencies are signs of serious euro frustration but not of ‘cold thinking’.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Do the German elections matter?

20. September 2013, von Almut Möller, Comments (0)

As journalists from across Europe flock to Germany to report on the federal elections this coming Sunday, the question that is asked by many is “Does their outcome matter for Europe?” There is no simple answer to this. Indeed the visions of the major parties on the future of the eurozone and the union as such to this day remain rather unclear – the candidates just don’t talk about them. I speculated in a blog piece in April that it was really only a question of time until the euro hits the campaign – well, generously put, this was wishful thinking. But really, I simply got it wrong.

For different tactical reasons, both the current coalition government of Chancellor Merkel and the major opposition parties, the Greens, the Social Democratic Party and the Left, remained mostly silent on the euro. And with an overall mood of complacency in the country there was no real need to respond to public demand apart from the odd prediction about a new chapter in the Greek drama. So in one of the most formative moments in the history of the European Union, with Germany playing a major role in shaping the future EMU, Germans are pretty much clueless about what to expect on the euro after September 22.

Well, no need for Germans to be wary , so it seems. Colleagues such as Ulrike Guérot and Julian Rappold have recently dissected the positions of the parties on the future of Europe and plotted out what to expect from different election outcomes. Both concluded that the upcoming elections are likely not to change overall German policy or make Germany speeding up with Eurozone reform even if a different coalition made it into power.

I overall agree with these predictions, which of course raise a lot of questions about the prospects for the currency union in the coming months. But I want to focus on a wider point here that has been raised elsewhere, but so far has been largely overlooked by German political elites. This is a subject to be tackled by the next government: The question that is asked increasingly outside of Germany is “Is Berlin still with us?”

Two narratives started to spread that challenge what used to be a certainty about Germany. These two narratives are unfolding in slightly different communities – the EU crowd on the one hand, and the security community on the other. If these narratives continue to be around, and indeed merge, they might put the next German in a rather uncomfortable spot with long-standing partners.

1. The first is the “Germany plays its national card and is willing to go-it-alone” narrative. It is well known in the meantime and encompasses the observation that Germany in the course of the euro crisis developed a good sense of its national interest and used its clout to impose its preferences for the Eurozone architecture on other members. A less prominent facet to this narrative in the continental European debate, but quite present in Britain and the US, is the prediction that the eurozone with its struggling southerners has made Germany look for alternatives elsewhere, notably the emerging economies. “The Germans are bigger than the eurozone”, to put it in a nutshell.
2. The second is the “free-rider” narrative of Germany surfing happily the waves of economic globalisation, with an exports model that fits into the demand of the day, while consuming global security that others provide for. The abstention in the UN Security Council on Libya still resonates, as does Mali – Berlin celebrating 50 years of Franco-German reconciliation while letting Paris do the dirty job in Africa. And then, Syria – aren’t the Germans out once again? “If only the world was a happier place, but it isn’t, and the Germans are cherry-picking the nice bits”, such is the storyline.

From a Berlin perspective I have to say that none of these narratives are entirely convincing to me, but I can see why this current coalition triggered these perceptions elsewhere. Clearly, even without agreeing one has to acknowledge they exist. And such views are likely to spread further unless a new German government made its positions on its European and international choices clear again, and acted accordingly. I don’t see a great deal of awareness over these issues here in Berlin. But I do believe that there are serious questions out there about Germany being a reliable partner, and these questions need a response from the next federal government in Berlin.

I’ll get back to where I see the next government placing itself with regard to these two narratives once the dust settles next week.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

German Government Embraces Multi-Speed Europe

25. July 2013, von Almut Möller, Comments (0)

It almost slipped off my radar in the summer break, which Berlin dived into at the end of June: the German government seems to change course on its stance towards a multi-speed Europe or, as analysts like to put it, differentiated integration.

If this is really the case then here is some revolutionary news that will change the face of the union as we have known it.

So, what happened? In an opinion piece for Frankfurter Allgemeine Zeitung, one of Germany’s leading daily newspapers, Foreign Minister Guido Westerwelle made the case for a hands-on approach towards different speeds for Europe last week.

It is worth quoting what I consider the essential passage of the piece:

“The dilemma is that in Europe 17 countries share a currency, but there are 28 in the Union. How can we move forward given this tension?

That will only be possible if we start thinking in new ways on integration policy. Reinforcing the eurozone means a clearer commitment by Europe to the principle of different speeds than was previously the case.”

To my knowledge this has so far been the most explicit statement on the need to embrace different speeds in order to engineer the widening gaps between the ‘ins’ and ‘outs’ of the eurozone by a member of the government over the past years. Up till now, the federal government carefully avoided to openly address the de facto decoupling of the eurozone from the wider union. Officials frequently pointed out that, according to the treaties, the euro was the currency of the whole union. With a few exceptions all EU members were ‘pre-ins’ to EMU. Obviously, such an approach reflects the destructive potential that multiple speeds might develop for the union as a whole. In the course of the crisis centrifugal forces have already stretched the cohesion of the union to its limits, and the eurozone is far from being a healthy core naturally taking the lead.

It is noteworthy that in his piece Westerwelle now uses the “17/28”, and not the “25 and a few odd outs” formula usually put forward by the government. Now, the question obviously is what to make of this? Arguably, this is a minister known for initiatives such as the “future of Europe group” that have never quite taken off. The newest declaration adopted in Palma de Mallorca this week went down almost unnoticed. It might well be that the minister’s move, regardless of its timeliness and strategic value, is lost in the silly season. Even more importantly, it depends on whether his message is supported in the federal chancellery. This is where all major strategic decisions have eventually been taken on the Eurozone over the past years. Clearly, the foreign office suffers from being marginalised even further over Germany’s ‘ Europapolitik’. It is possible that the minister and his aides in the foreign office now make an attempt to win back some territory over the strategic questions related to the future of the union. But will this initiative fly?

Politically speaking the contentious issue of multiple speeds is much more relevant for both insiders and outsiders of the eurozone than the initiatives of Guido Westerwelle to trigger an institutional debate on Europe’s future. In terms of substance there might well be allies in Paris on differentiated integration, certainly more so than on the institutional questions over which the German foreign office struggled to bring the French counterparts in. Interestingly, Jacques Delors has been promoting his ideas of rethinking EMU and reconciling it with what he calls “Greater Europe” on various occasions over the past months. Is he intellectually paving the way for the socialist leaders in Paris to find common ground on the future of Europe with Germany again?

It is difficult to tell whether the minister’s piece reflects the wider views in the government, and whether it turns into government policy in the fall. The federal elections could obviously make a difference if they brought a different coalition into office. But if we see more of the same in September, and if Westerwelle’s move is indeed part of the overall thinking in the German government (remember that Wolfgang Schäuble has a soft spot for differentiated integration too), we might see Germany starting to actively engineer a new kind of union under the next government.

“We must always have an eye on the part, but also on the whole” is how the foreign minister concludes his piece. Is Germany about to plot out in greater detail a strategy for a Europe of different speeds that balances the needs of the eurozone with those of the wider union? There will be tough issues to address in the coming months and years. The most important one is clearly whether it will be possible at all to reconcile the future economic and monetary union with the common market as a whole. And what is the glue that will bind the new layers of membership together? In terms of substance, process and alliances there is still a great deal of thinking to be done to make a union within the union work.

German Federal Constitutional Court Chews on Role of European Central Bank

18. June 2013, von Almut Möller, Comments (0)

Verdicts from Karlsruhe usually serve as pacifiers for the German public and, more recently, for the eurozone as a whole. Remember the ruling on the ESM and the Fiscal Compact, which the German Federal Constitutional Court concluded was reconcilable with the country’s basic law, or Grundgesetz, in September 2012. What a relief this announcement was for the eurozone’s capitals in their step-by-step struggle for the rescue of the common currency. Germans tend to have a great deal of respect for their constitutional court, and fellow Europeans over the past years learned that every year or so they would have to set eyes onto this city in the southwest of Germany: What does Karlsruhe say?

However, on the euro, things remain far from being put to rest. The overall question that continues to loom is to what extend the more recent rescue measures are covered under the Grundgesetz, or whether they lead to a further Europeanization that the German constitution does not allow for in its current shape. The eurozone continues to be a moving target and at the time of the ESM verdict in the fall of 2012 the judges already knew they would have to chew on another measure of the euro rescue: the ECB’s Outright Monetary Transactions (OMT) programme announced as the court was still dealing with the ESM and the Fiscal Compact. With the programme the ECB said it was ready to buy government bonds of eurozone countries affected by the crisis in order to stabilize their interest levels.

Critics say that this programme violated EU treaties, in particular article 123 of the Treaty of the Functioning of the EU. It is however widely assumed that without this bold move of the ECB the eurozone would not have made it into 2013. What is being questioned though by several groups, among them the NGO “Mehr Demokratie” supported by various organisations and 37.000 German citizens is the legality of the rescue measure. Did the ECB go well beyond its mandate and did it thereby violate the budgetary rights of the German parliament and of German taxpayers? Clearly, these are fair and reasonable questions to ask.

With an impressive line-up including Minister of Finance Wolfgang Schäuble, powerfully eloquent political figures such as Gregor Gysi, the head of DIE LINKE in the Bundestag, and the euro-critic MP Peter Gauweiler, the president of the Bundesbank Jens Weidmann and ECB executive board member Jörg Asmussen, the stage was set for drama in Karlsruhe. The media particularly loved what was framed as two gladiators, reportedly friends from university days in Bonn, confronting each other in the courtroom: Jens Weidmann, well-known for its critical stance on the ECB’s bond buying programme, was the only member of the Governing Council that voted against the programme in the fall of 2012. Jörg Asmussen then has been an articulate and public advocate of the ECB’s programme, making the point that while indeed the mission of the central bank was to work for price stability in the eurozone, there was no point in sticking to a narrow interpretation of the mandate when the eurozone was facing a breakup. There are a number of very complex issues that the court will have to look at in the months to come, and many of them are without precedent. But not surprisingly, German gladiators deliberate even the hottest issues in the calmest way – no big surprises in the courtroom last week.

Politically speaking the issues on the table are certainly powerful, and potentially challenging what has perhaps been the most effective intervention in the euro rescue so far. The weird thing is that while the current German government and all that work for a further recovery of the eurozone certainly long for yet another pacifier made by Karlsruhe, the court might have to disappoint when it announces its conclusions in the fall: de facto, Karlsruhe for now is dealing with a non-issue. So far, the ECB only announced the OMT programme without implementing it in detail, a move that proved enough to prevent the breakup of the eurozone. Can a mere announcement form the basis of a court case? The president of the Federal Constitutional Court Andreas Voßkuhle during last week’s hearings made the point that the court’s power was limited. The ECB was an independent European institution, indicating that it was beyond Karlsruhe’s competence to rule over the ECB’s action. Commentators say there is a chance for the case to be conveyed to the European Court of Justice in the end – which perhaps would bring a different dynamic to the outcome.

What has already been a feature of last year’s deliberations on the ESM and the Fiscal Compact was visible again last week: The highest German judges would perhaps like to stay away from the politics of the euro rescue, but because of the nature of the complaints clearly struggle to do so. Ironically, the ECB would (or should) also be more in its comfort zone in a less politicised role.

The real baffling issue around last week’s shoulder rubbing between Karlsruhe and Frankfurt is therefore the weakness (some would even argue the absence) of politics. Without any doubt, the OMT will not solve the problems of the eurozone in the end. For the eurozone’s governments still to make their case! I am not sure the June summit will bring some of the much-needed decisions and will get back to this.

Help the Bruised French out of the Corner!

23. May 2013, von Almut Möller, Comments (1)

There has been a lot of bad news last week: the Eurozone is further contracting, France is moving into recession and the EU has been dramatically losing support all across Europe according to figures published in a Pew poll.

Watching President Hollande’s Élysée address one year into his presidency one saw a cornered head of state fighting for his survival at home and against a growing mistrust in Europe towards the French willingness and ability to reform. Not surprisingly, President Hollande, in a desperate attempt to lift the spirits of his fellow Frenchmen, started off his speech with the French leadership in Mali. Not surprisingly, the French president then tried to gain ground vis-à-vis the dominant German neighbour by coming up with a ‘European initiative’: a real economic government, a strategy for investment, a European Energy Community and a eurozone budget. While there might be doubts about the depth and the impact of his proposals one has to acknowledge that the French president did come out of the corner.

In Berlin, however, one hears a lot of derisive commentary about France these days and there are indeed clearly different views about the future architecture of the eurozone. But I saw a man who believed in what he said, who warned that the recession caused by austerity was threatening the very identity of Europe. A President who insisted that his country had made its choice for Europe right from the start, who in the course of the crisis has been trying to “shake things up in Europe” and who is increasingly frustrated about the lack of response from Berlin. A frustration that is likely to expand also to his social democratic friends in the SPD, despite Hollande’s presence during the celebrations of the SPD’s 150th birthday this week. Hollande is watching his country being put into the camp of the ‘poor southerners’ and being publicly accused by the President of the European Commission of not understanding the opportunities of globalisation. What a humiliation for a proud nation to being graciously awarded an extra two years to cut down its deficit – in terms of communication I found this a disaster.
We have got to the point where a public blame game is going on that undermines and disempowers even the most potent leaders in Europe – how does this create the urgently needed trust among citizens that their politicians will eventually manage to find a way out of the crisis?

In all this – and it feels almost absurd living and working here – Berlin still feels like an island of peace. Recession? Didn’t the most recent numbers suggest that the German economy continued to grow, albeit mildly? And doesn’t the minor growth rate support the chancellor’s argument made continuously during the crisis that Germany cannot lift the rest of the eurozone on its own? A lack of citizens’ support? Doesn’t Germany score best in the Pew poll, with 60 per cent of Germans still in favour of the EU despite taxpayers’ money being used for the bailouts?

I wonder if Angela Merkel sometimes wakes up in the morning and asks herself whether she is Alice in Wonderland. Like Alice’s fantasy world, Merkel’s Berlin is full of absurdities these days. As the crisis is threatening to tear the union apart, Frau Merkel enjoys a never ending round dance around herself and an abundance of what I would like to call ‘conversations of comfort’. Not that it is her who actively triggers them – they just seem to happen. Just last month she conversed with the Polish Prime Minister Donald Tusk in the proud representation of Deutsche Bank in Berlin. Just having published a biography on Merkel’s foreign policy Stefan Kornelius, the foreign editor of Süddeutsche Zeitung, led the conversation: no drama, no real challenge, just pleasure and comfort and agreement, and the Polish Prime Minister doing the job for Merkel by raving about pretty much anything Merkel and German. The venue was packed on this occasion and politics, business and the media gathering all seemed to be a bit in love with the lady that holds court in the most non-courting way: she just sat there and enjoyed it as seemingly everybody else. A few days later, it felt like the whole of Europe was hanging on her every word when Frau Merkel conversed with the editors of a women’s magazine in a trendy Berlin theatre, chatting about cooking and what she likes in men.

When are the media starting to do their job properly? I really hope for German and French national televisions to gang up and convince Merkel and Hollande to battle it out openly in a TV duel. One of Merkel’s ways of dealing with potentially uncomfortable adversaries is by simply ignoring them – a strategy that seems to work and make her look even stronger. With a few exceptions, she hasn’t even given her social democratic challenger Peer Steinbrück the dignity of a direct address yet. The worst thing that can happen to Hollande in his attempt to contribute to the future architecture of the eurozone now is to be ignored by the German Chancellor. Berlin should know its responsibilities.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

On Axes and Party Politics: the End of Europe’s Predictability

30. April 2013, von Almut Möller, Comments (0)

In a commentary last year on the eve of the celebrations of the 50th anniversary of the Élysée Treaty I wondered to what extent the notion of ‘the Franco-German axis’ was still a useful framework to analyse politics in Europe. I argued that in the course of the euro crisis, economic and monetary policies in Europe have become an issue of political majorities along party families rather than of axes such as the Franco-German. Much was at stake in rescuing the euro, I argued, and political leaders travelling to European summits were forced to be increasingly responsive to their electorates—which I believed was good news for democracy. Forget about the Franco-German axis and embrace party politics as a sign of political maturity of the European Union.

I have been challenging myself on this point over the past months on various occasions and, what can I say, I am not at all convinced. As much as those small pockets of europeanised party strategists would like to see it, there is no real alignment of the European left yet, determined to jointly win back majorities to shape a ‘social Europe’ as the new eurozone is in the making. Neither is there a solid conservative bulwark led by the German chancellor to europeanise the notorious Swabian housewife. Rather, the strategies that governments embrace these days in navigating the crisis reflect a much wider repertoire. And while it seems that the old and rather predictable game of summits, axes and treaty reforms is over, the rules of the new game are yet to be written.

In the German context, Peer Steinbrück, the social democratic candidate for the 2013 general elections, is far from leading Europe’s socialists in the reconstruction of the eurozone. Indeed for tactical reasons he chose not to even try and challenge Angela Merkel in what has become her domaine réservé. Or might he be pulling the strings behind Hollande, and the French Left is doing the messy job for him now? (Trying to undermine Merkel from the outside is likely to have the opposite effect, but quite frankly I don’t believe in the existence of such witty tactics anyway). Martin Schulz, recently branded “an extension of Adenauer by social democratic means” with a whiff of respect by, of all papers, the conservative daily Frankfurter Allgemeine Zeitung is in his ambition to become the joint candidate of Europe’s social democrats for the next president of the European Commission, doing a much better job. However, Schulz has just disappointed those looking for order on the Paris angle by seconding Angela Merkel when she was personally accused by leading French socialists of dominating and ultimately destroying Europe.

I still stick to the observation that in the course of the crisis, European Union affairs have been politicised to an unprecedented degree. Party politics matter. But for those (including myself) who predicted that the rather predictable old order (‘the Franco-German axis’ ‘the net contributors versus the recipients’, ‘the Weimar Triangle’ etc.) would make way to a similarly predictable order formed along political colours and ideologies have been proven wrong.

The truth is: things have become utterly mazy and therefore rather unpredictable. Now it is for Europe’s great minds to make sense of the new rules of the European power game, of political colours and ideologies, of institutional quarrels (prominently featuring the Commission president these days), of reflexes of national pride, of the new power of domestic constraints, of old balance-of-power thinking, of the shadow of history returning, and of a longing for rationality that is expressed in Europe’s elites turning to scholarly knowledge (and, not surprisingly, failing to find answers). Welcome to the politics of unpredictability.

One thing is for sure: Those who hold the key to understanding the new game will be shaping and, ultimately, winning it.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Dijsselbloem or DijsselDoom – a Dutch Perspective

9. April 2013, von Adriaan Schout, Comments (0)

I already presented my reservations against the appointment of Dutch Minister of Finance, Jeroen Dijsselbloem (Labour Party) as President of the Eurogroup. The public outrage following the bankruptcy of the banking sector in Cyprus has raised new questions concerning his ‘presidency’ (for which in Dutch the more modest ‘chairmanship’ is used). My initial doubts concerned the question whether this prestigious position would be in the interest of the Netherlands – and I was bold enough to propose Olli Rehn as possible candidate for a permanent chair after his departure from the European Commission in 2014.

The Cypriot turbulence in March immediately tested Dijsselbloem’s ability as a chair. He had become minister of finance in the Netherlands only in November 2012 and his appointment was almost immediately followed by rumours about his candidacy as president of the Eurogroup. In that respect, the criticism of his lack of experience and authority during the Cyprus crisis came as no surprise. For his two rescue proposals for Cyprus the media treated him on nicknames such as “DieselBoom”, “DijsselDoom” and “EuroBaldrick” (borrowed from the series Blackadder) as well as on appeals for his resignation. The fierce debates he provoked centre on the question as to whether the deposit holders are really completely safe. ‘True’ EU believers – and bankers who long for stability – would have preferred a banking resolution including European deposit guarantees in order to prevent bank runs whereas EU sceptics wished for the dismantling of the euro. Moreover, as was to be expected, Dijsselbloem was scorned as a Dutch puppet of Germany and blamed for defending the Dutch position instead of being a neutral chair.

Yet, in view of political realities like the upcoming elections in Germany and the public reservations against saving zombie banks and eurozone countries, the decisions of the Eurogroup to dismantle the Cypriot banks and to bail in seem inevitable. Moreover, given the lack of money in any country, it is highly unlikely that former Eurogroup President Juncker would have been able to orchestrate a different outcome. Approximately € 3 trillion is needed to stabilise banks in the eurozone. It is simply impossible to avoid more haircuts. Still, Dijsselbloem’s presentation of the measures appeared cold and his alleged Dutch bluntness provoked comments like the one by Juncker that you sometimes have to lie as chairman of the Eurogroup – as if financial markets preferred unreliability instead of predictability.

Also, the role of the chairman of the Eurogroup seems to be widely overestimated, if one has a close look at the EU power structure. A lot of criticism on Dijsselbloem is politically naïve in view of the strong resistance against the Cyprus bail-out not only in Germany but also in countries such as France where EU Affairs Minister Moscovici talked about “casino banking” on Cyprus. It seems widely regarded as reasonable to bail-in bondholders and deposit owners – particularly in the absence of an effective European resolution mechanism.

Hence, Dijsselbloem seems to have withstood the criticism well so far. Yet, there are issues for which he could be criticised, which in some cases can be blamed on his lack of experience. First of all, he made himself more important than he really is by ̶ during the hearing before the European Parliament ̶ taking the blame for the bailing-in of savings below €100 000 in the first deal with the Cypriot government. Firstly, the chair (President of the Eurogroup) is not a decision maker but mainly a spokesman: it was the decision of the Eurogroup to bail in those savings. Secondly, he referred to the bail-in of Dutch bondholders. A chair should be as neutral as possible and avoid telling the world how good his native country is in dealing with a crisis. Particularly Dutch politicians should take care not to be too outspoken. Dijsselbloem’s presentation of the Netherlands as a role model fuelled the criticism that he was pursuing a national agenda. Thirdly, he talked in terms of “core” and “periphery countries” as well as “the north” and “the south” whereas a chair should avoid divisions at any cost (as he later seemed to have realised).

Even though these issues are mainly issues of style and nothing serious, the international press once again saw a reason to complain about Dutch bluntness and about pushing through the Northern austerity agenda. Similarly, when Dijsselbloem, as Dutch Minister of Finance, attacked the Commission’s request for an additional € 11.2 billion for the budget for 2013, a question basically unrelated to the euro crisis, this led to head lines such as ”Dijsselbloem, president of the Eurogroup, joining forces with the UK” (EurActiv 3 April 2013). This shows that it seems to be inevitable that the chair of the Eurogroup is not regarded as neutral but as a national politician.

If Cyprus can cause an existential euro crisis overnight, it is very likely that more and more serious crises are to be expected. Against this backdrop, complaints about Dutch bluntness, accusations of Dijsselbloem acting as a German puppet or being part of the British camp, are particularly unhelpful both for the EU and for the Netherlands. What the Eurogroup urgently needs is a professional chair!

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

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