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Mon August 15, 2011
Germans Debate The Cost Of Keeping A Eurozone
Originally published on Mon August 15, 2011 4:36 pm
Within weeks, Europe's spreading debt crisis will force Germany to decide on one of the most critical questions in the Continent's postwar history: Will currency union be strengthened or weakened?
Germany, with the biggest and healthiest economy, has to make the call, and this has prompted a fierce national debate.
The 17 European countries that use the euro as their common currency have such widely varying debt burdens that they cannot survive as a single eurozone unless the strongest rescue the weakest.
The cost of that intervention, however, could conceivably approach 1 trillion euros ($1.45 trillion) and would necessarily involve a major shift in governance authority from individual states to the European power center in Brussels.
Without Germany's wealth and credit standing, nothing can happen. But for Germany to give its blessing to a eurozone rescue mission, German leaders would have to compromise on core principles of thrift and sovereignty that until now they have fiercely defended.
Germany Still Supports Euro
"Germany's commitment to the euro is still strong," says Daniela Schwarzer of the Germany Institute for International and Security Affairs, "but it has been hesitant in helping the indebted countries, because it is recognizing that the eurozone is not what Germany expected it would be."
When the single currency was launched in 1999, Germany was among its strongest supporters, remaining true to a tradition of supporting European integration that dates to the government of Chancellor Konrad Adenauer in the postwar era.
But many German leaders believed that any government adopting the euro would be as thrifty and careful with it as they had been with their own currency, the German mark.
"They wanted the euro, but they wanted it to work in the German way," says Schwarzer, who directs the European Integration Division at her institute. "[They wanted] respect for rules and stability."
Eurozone Rules Ignored
In fact, the eurozone had some rules, but they were not respected. Countries using the euro were not supposed to run budget deficits that exceeded 3 percent of their gross domestic product, but many ignored that guideline.
European banks shared some of the blame, by aggressively offering countries low-interest euro loans. Several countries, with Greece in the lead, could not resist the temptation to borrow. And borrow. And borrow. Before long, they were in trouble and had to borrow more just to make their interest payments. It was the exact opposite of the German way.
"There is a total mismatch between countries who have done their homework and those who have not," says Markus Kerber, a prominent euro critic in Berlin. "The Germans have [done theirs]. We are now having solid growth. [Other] countries have just taken the benefits of the euro to make a policy of public spending."
German Chancellor Angela Merkel has so far supported collective moves by European governments to establish a rescue fund and buy government bonds on the secondary market issued by Greece, Portugal, Spain, Italy, and Ireland.
But she has taken each step reluctantly, and often only after first saying she would not. As the cost rises, so does the German opposition to a major bailout effort, even within her own Christian Democratic Party.
"One of the ideas at the founding of the eurozone was that economies within the eurozone would come together in terms of their productivity and wealth," says German parliamentarian Klaus-Peter Willsch, a Christian Democrat from the state of Hesse. "In fact, they didn't. So I think we have to think about a redesign of the eurozone."
Willsch and other euro skeptics have begun arguing that the weaker countries should consider opting out of the eurozone and going back to their old currencies, at least temporarily, to reorganize their finances.
Costs Of Leaving The Eurozone
That would be costly for those countries and also for the banks that lent them billions of euros. Leaving the eurozone would entail at least a partial default on their obligations, making the banks unable to collect fully.
German banks would suffer as well. Many own large shares of the Greek, Spanish, and Italian banks that would be stuck with the bad debts.
The alternative to shrinking the eurozone is to redesign it in the other direction, by making it stronger and more unified, with stricter rules and more top-down control.
Wealthier states such as Germany would take more responsibility for the poorer states. The debt burden would partially be shared by the eurozone as a whole, either through the issuance of eurozone bonds or by more direct financing. Such a move would give the eurozone more political cohesion — a reform Germany has resisted until now, but which may become necessary.
Among the supporters of such a move is the Association of German Banks, representing 220 financial institutions from Deutsche Bank, the largest, to small private banks.
"We have a currency union without a political union or a fiscal union, and I think it is necessary to go more in the direction of a fiscal and a political union," says Michael Kemmer, the association's CEO.
Even a partial breakup of the eurozone could be damaging to the European economy, and it would be a significant retreat from the political vision that has inspired Europeans for many years and redefined the political identities of German youth.
"They pass part of their studies at European universities abroad, or they take an internship with a French-based enterprise, but work in London, so they understand how Europe works," says Gerhard Schick, a member of the German Parliament representing the Green Party. He says any step back from European integration would cause an "upheaval" in the younger German generation.
Costs Of Political Union
On the other hand, if the eurozone is now to become a political union, it would cost Germany billions of euros, maybe hundreds of billions, to help weaker countries. Germany and other countries would have to cede some of their authority to the European Parliament and other pan-European organizations.
Markus Kerber is representing a group of German enterprises in a case before Germany's Constitutional Court, where he will argue that a bailout of indebted eurozone countries would violate the German Constitution. He has outlined his argument in a pamphlet, "Wake Up, Citizens! Against the Expropriation of the German People in the Name of Europe."
"The bailout mechanism is a way to deprive Germany — and the Netherlands and Austria and Finland — of the citizens' right to dispose of their own taxes and defend their nation's [credit] rating," Kerber says. He likens the campaign to the U.S. "Tea Party" movement.
"We are defending the prerogative of fiscal sovereignty," he says, "against the European bureaucrats."
All this has put Merkel under some of the toughest pressure any German leader has faced in recent years. Her meeting Tuesday in Paris with French President Nicolas Sarkozy will be just one of many leadership tests she will face in the coming months.
ROBERT SIEGEL, host: From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.
MELISSA BLOCK, host: I'm Melissa Block.
And in this part of the program, Europe's economy. We'll hear about the dismal job market and questions about whether much of Europe can continue to share one currency.
SIEGEL: On the currency markets, the euro gained a little value today and that means there must be some optimism for a big meeting in Paris tomorrow. German Chancellor Angela Merkel and French President Nicolas Sarkozy meet to talk about the euro.
BLOCK: The debt crisis in Greece and other European countries has jeopardized the future of the euro, and with it, the idea of European unity.
NPR's Tom Gjelten is in Berlin to tell us about what that means for Germany.
TOM GJELTEN: It's a pleasant Sunday afternoon in Berlin, and Berliners are out to enjoy it. The stores are closed but the sidewalk cafes are open and they're full. Germans have money to spend. Germany in recent years has achieved a prosperity and a quality of life that puts it above other countries in Europe. But this is still Europe.
How much for the cappuccino?
UNIDENTIFIED MAN: Three ten, please
UNIDENTIFIED MAN: Yeah.
GJELTEN: Good. Thank you.
UNIDENTIFIED MAN: Yeah. Yeah.
GJELTEN: That's three euros, about four and a half dollars. Whether you order a cappuccino in Paris or Rome or Athens, you pay for it with euros. It's the European money, a symbol of European unity. But the euro is now in danger. Germany is the only country that can save it.
In a way, the idea of the euro was flawed from the start. Germany, as its number one supporter, figured the countries that adopted the euro would treat it the way Germans treat their money: They'd be thrifty.
Daniela Schwarzer of the German Institute for International and Security Affairs.
Dr. DANIELA SCHWARZER: Germany, on the one hand, sticks to the euro but, at the same time, it still wants the euro to work the German way, meaning a respect of the rules and stability.
GJELTEN: There were rules, sort of. Countries weren't supposed to run big budget deficits. But the rules weren't enforced. Meanwhile, banks figured countries using the euro were good credit risks, so they offered them low interest euro loans. A few couldn't resist the temptation to borrow, and borrow, and borrow - the opposite of the German way.
Before long, they were in trouble and had to borrow more just to make their interest payments. Some euro countries started drifting toward default.
German Parliamentarian Klaus-Peter Willsch says it's time to admit the euro plan didn't work.
KLAUS-PETER WILLSCH: One of the ideas was that economies within the eurozone would come together in terms of productivity. In fact, they didn't. So I think we have to think about redesign of the eurozone.
GJELTEN: Willsch, a Christian Democrat from the state of Hesse, says maybe the eurozone should be smaller, with the weaker nations dropping out and going back to their own currencies. That would be costly for those countries but also for the banks that loaned them billions of euros, euros they would not fully recover.
The alternative to shrinking the eurozone is to redesign it in the other direction: to make it stronger, more unified, with stricter rules and more top-down control. The wealthier states, with Germany in the lead, would take responsibility for the poorer states. The Association of German Banks favors this course, says the group's CEO, Michael Kemmer.
MICHAEL KEMMER: We have a currency union without a political union. And I think it is necessary to go more in the direction of a fiscal and a political union, and there we need leadership from the stronger European nations.
GJELTEN: There are strong arguments on each side. Even a partial breakup of the eurozone could be highly damaging to the European economy. And Gerhard Schick, a Green Party representative in the German Parliament, says a retreat from Europe would be a blow against all the young Germans who've become accustomed to thinking in European terms.
GERHARD SCHICK: They pass part of their studies at European universities abroad, or they make an internship with a French-based enterprise. But they don't work in France but in London. So they understand how Europe works.
GJELTEN: On the other hand, if the eurozone is now to become a political union, with the wealthier states helping the poorer ones, it would cost Germany billions, maybe hundreds of billions. Plus, Germany and other countries would have to cede some of their authority to Europe-wide organizations.
Markus Kerber, a prominent Berlin lawyer, is so alarmed by the prospect that he's prepared to lead something like a German Tea Party movement in defense of what he calls the principle of fiscal sovereignty.
MARKUS KERBER: That is to say, that German citizen and their representatives keep the right to dispose of German resources and to defend the rating of the nation.
GJELTEN: This choice for Germany - to strengthen the eurozone or to abandon it - is as vexing a political challenge as any the country's leaders have faced since the unification of East and West Germany 20 years ago. There are risks everywhere, costs on all sides.
Chancellor Angela Merkel's meeting with Nicolas Sarkozy tomorrow will be just the first of many leadership tests for her in the next few months.
Tom Gjelten, NPR News, Berlin. Transcript provided by NPR, Copyright NPR.