What is Germany’s vision for Europe?

8 December 2011
By Kabir Chibber Business reporter, BBC News

“We have started a new phase in European integration,” Angela Merkel told the Bundestag last week.

“There are no quick and easy answers. Resolving the sovereign debt crisis is a process and this process will take years.”

Few people outside Germany cared much when the quiet and unassuming chancellor stood to address members in the cold and clinical surroundings of the German parliament on 2 December.

But her words were keenly awaited by the German political elite.

Indeed, the speech may eventually be seen as one of the defining speeches in the recent history of the European Union.

In it, Mrs Merkel outlined the German vision of the future of Europe.

As Europe’s largest economy – and biggest contributor so far to the bailouts of Greece, the Irish Republic and Portugal – Germany’s view going into this week’s EU summit is crucial.

“This is all about avoiding the next crisis,” says Martin van Vliet, the senior economist at ING Bank in Amsterdam. “It has little effect on this one.”

In the current climate, Mrs Merkel’s blueprint for the future of the 27-member EU – and the 17-member eurozone – may well be the only one that matters.

Fiscal union

Mrs Merkel has called for a new EU treaty – with more power in controlling the finances of wayward nations.

“We aren’t just talking about a fiscal union,” she told German lawmakers. “Rather, we have begun creating one.

“We need budget discipline and an effective crisis management mechanism,” she said. “So we need to change the treaties or create new treaties.”

The German government wants the new treaty to allow the EU to veto national budgets in the eurozone that breach the so-called “golden rule” regarding deficits.

Mrs Merkel wants to introduce sanctions if budgets end up having larger deficits, and she wants the European Court of Justice to have jurisdiction over disputes.

Pushing to transfer more national authority to Brussels at a time when the entire European project often appears to be on the verge of collapse may seem like a brazen strategy, particularly as there were already rules in place to prevent the current debt crisis from getting to this stage.

The Growth and Stability Pact was introduced when the euro was agreed in 1992. It limits budget deficits to no more than 3% of a country’s total economy.

And following the recession in the early 2000s, who was it that quickly violated the pact? Germany and France.

Even Germany’s closest ally is wary of some of Mrs Merkel’s proposed changes, and the European Parliament President, Jerzy Buzek, warned last Friday that treaty change could be divisive and “dangerous”.

That is because a treaty change would have to be approved by all 27 states – and with some requiring referendums to give up sovereignty, it could get messy.

So in a press conference with the French president on Monday, Mrs Merkel said that the treaty change would be for all 27 members – or for the 17 members of the eurozone to sign it, and other nations to do so voluntarily.

And subsequent decisions on issues such as bailouts will be passed by qualified majority, not unanimity as it now.

Whichever is easier for all of you, seemed to be the German message.

Inflation fears

Germany’s position is defined as much as by what it does not want to do as what it does.

It does not want to let the European Central Bank use its unlimited resources to fund the eurozone rescue fund, and it does not favour pooling the debts of all the eurozone member states together into so-called eurobonds.

On the first point, Mrs Merkel has said she does not want the central bank to rescue governments by printing money.

This is because pumping money into the economy can lead to inflation – and Germany is still scarred by hyperinflation in the early 1920s under the Weimar Republic.

In April 1919, 12 marks were needed to buy one US dollar. By 1923, 4.2 trillion marks were needed.

And this was quickly followed by the Great Depression.

Since 1957, the Bundesbank has targeted inflation to prevent a repeat from ever happening – and was the first central bank to have full independence.

This created one of the most stable currencies in the world – and Germany insisted that the Bundesbank’s successor, the ECB, should adopt a similar mandate and also be based in Frankfurt.

In her speech, Mrs Merkel said that “the European Central Bank has a different task from that of the Fed or the Bank of England”.

By this, she means that the ECB (and the Bundesbank) differ from the Federal Reserve and the Bank of England in that they are not mandated to be the lenders of last resort – so they don’t have to lend when the markets fail.

Nevertheless, the head of the ECB, Mario Draghi, hinted last week the bank might consider some kind of action if policymakers agreed on a “fiscal compact” for the euro area.

There is also talk of the ECB contributing directly to the IMF, which in turn would lend to stricken member states or to the bailout fund.

On the issue of eurobonds, Mrs Merkel called the idea “extraordinarily distressing”.

“A joint liability for others’ debts is not acceptable,” she told the Bundestag. “Eurobonds are not a rescue measure in this crisis.”

The German political establishment is loath to get into the idea of the German taxpayer backing the debts of their much less productive neighbours in the south.

“For Germany, it is a morality play,” says Mr van Vliet. “They say we did our homework and some countries in southern Europe did not. That is the dangerous game they are playing.

“They want to avoid the moral hazard problem.”

Anyway, the German constitutional court said in September that guaranteeing foreign debts would be unconstitutional.

‘Right path’

Mrs Merkel has vetoed most of the options suggested by France and other countries like Spain and Italy, which have passed unprecedented austerity reforms.

That leaves everyone else in the eurozone financially desperate, politically weak and looking to Berlin to be told what to do.

And so Mrs Merkel concluded her speech with: “The future of the euro is inseparable from European unity.”

“The path ahead is long and it is difficult but it is the right path for the joint good of a strong Germany in a strong European Union, for the benefit of people in Germany and in Europe.”

And then she was done, to polite applause.

“If you look at the future, one thing is now we all know what the flaws of the eurozone are,” Mr van Vliet says. “The question is whatever they do, will it be enough.

“One thing is that it will never be like what you have in the US – a political union.”

In that case, someone has to take charge. For the rest of Europe, this might mean years of being told what to do by the Germans.