These are the three key European leaders of the moment, but a Eurozone ménage à trois remains highly unlikely…
Over the course of the Eurozone crisis the German government has been the most important influence on policy, raising the question of its potential hegemonic role. Its prescriptions have followed an ordoliberal script. Over the past couple of weeks Berlin’s policy has been presented with two linked challenges: the European Central Bank (ECB)’s announcement of Quantitative Easing (QE) in the face of considerable German criticism; and the election of a SYRIZA-led coalition in Greece wishing to renegotiate the terms of its rescue. What’s at stake, then, with these twin challenges to the German-led management of the Eurozone crisis?
Let’s look back at the story so far. When the saga began with the Greek sovereign debt crisis, Chancellor Merkel and the German government were charged with being too slow in responding, of allowing the crisis to gather momentum and the costs of rescue to rise. The explanation offered to me in an interview in the German Finance Ministry last November was rather different, although possibly influenced by ex-post-rationalisation.
It was stated that the government had a four-fold policy – and note the sequence. First, debtor states had to draw the necessary consequences and institute credible reform programmes to preserve the Eurozone’s long-term stability. Second, the design faults of Monetary Union had to be rectified by creating a Fiscal Union to ensure sovereign debt was controlled and credible domestic rules had to be introduced in all member-states. Third, a Banking Union had to be created with a resolution system that, should banks become insolvent, would have the confidence of the financial markets. Finally, rescue funds had to be established for Eurozone states in serious difficulties. The European Stability Mechanism and the previous ad hoc arrangements were last resort mechanisms to avoid risks of moral hazard, and were conditional on the other steps being taken.
German policy principles have been highly influential. They have provided the script for managing the Eurozone crisis from 2010-14. German concerns about moral hazard have resulted in the rejection of a more solidaristic approach to debt via Eurobonds and the insistence instead on debtor states taking responsibility. Similarly, in the case of Banking Union, as Mathias Matthijs and Daniel Keleman have argued, the Single Resolution Mechanism remains incomplete because Berlin does not wish German savers indirectly to pay for the resolution of a failing bank elsewhere in the Eurozone. Rather, it wants banks (and not governments) to fund the mechanism through nationally-funded schemes.
Domestically, Germany is following a pattern that has two sources. The first is the ordoliberal school of thought, with its prescription of a set of rules to effect market and policy ‘order’. Unlike neoliberalism, which reifies market efficiency, ordoliberalism presupposes the need for an ‘economic constitution’ precisely to correct inefficiency. Nevertheless, the precise content of ordoliberal prescriptions is contested, as Wade Jacoby has demonstrated. This contestation constrains Berlin’s policy-makers because other ‘true believers’ – whether the President of the Bundesbank, Jens Weidmann, or serial litigants challenging the legality of Eurozone policy actions before Germany’s Federal Constitutional Court – are part of a heated policy debate amongst German policy elites. The second source is a growing politicisation of German European policy that has seen public opinion and party politics increasingly sensitised to this contestation. Although a grand coalition of the parties has continued to support Eurozone policy measures in Parliament, the consensus is fraying at the edges, as seen notably with the emergence of the anti-Euro party, ‘Alternative for Germany’.
So how is Berlin’s policy at odds with the measures announced by Draghi and on collision course with the incoming Greek Prime Minister, Alexis Tsipras, who has told jubilant supporters that he wants to write off half of Greek debt?
Let’s start with the ECB. Criticism of QE has been particularly strong in Germany. Berlin’s main complaint is that QE will reduce the incentives for the debtor states, and indeed Italy and France, to undertake necessary structural reforms. Merkel and her Finance Minister, Wolfgang Schaüble, have been discreet in their comments, indicating that monetary policy is the responsibility of the ECB. Once again the authoritative critical German voice has been Weidmann. He reportedly persuaded colleagues on the ECB Governing Council that 80% of QE bond purchases should be via national central banks, rather than collectively via the ECB. This reduces the risk-sharing and moral hazard aspects of QE of particular concern to Germany. At the same time Weidmann has reiterated that he is unconvinced by QE, indicating that he had voted against it. In the final analysis, though, ECB independence means that Berlin’s options are limited now that QE has been initiated.
The election outcome in Greece has taken German discomfort a step further. SYRIZA has made clear its goal of re-negotiating the terms of its rescue and the German government that these terms should be maintained. SYRIZA’s nationalist coalition partners have also been critical of the rescue, emotively accusing Merkel, Schaüble and outgoing Greek Prime Minister Antonis Samaras of ‘terrorism’ during the election campaign. The leading German tabloid produced the headline about Panos Kammenos, leader of the right-wing Independent Greeks: ‘Merkel-hater in Greek coalition’. Bild went further with a feature entitled ‘Will the victory of the Euro-nightmare cost us billions?’. Controversially, Kammenos has also been an advocate of Germany paying Greece billions of Euros in Second World War reparations.
The specific challenges presented by the new government are twofold, both reflecting the concept of moral hazard. Can some moderation of austerity policy accommodate its position without undermining Berlin’s effective first principle of crisis management: that debtor states make a clear change of policy direction? And what example would any accommodation with Greece set for other states? Here the rise in Spain of the new left-wing Podemos party, an ally of SYRIZA, comes into play. Spain must hold elections by December 2015 and recent polling has shown Podemos to be the leading party.
In sum, there is a real risk emerging that the lurid headlines that both QE and the Greek election result have attracted in the German press bring the conflict between Eurozone debtors and creditors to the fore in such a way that public confidence in the currency is undermined in Germany. In this sense the tone of the German government’s response is as important as the substance and it is going to have to think very carefully about both. In autumn 2014 it was concerned about levels of debt in France and Italy. That now feels like ‘small beer’. With the Tsipras government insisting it wants to remain in the Euro, GREXIT – one possibility that has doubtless featured in Berlin’s scenario planning – is not a clear early solution. The way forward may turn out to be more ‘muddling through’.
What is manifest is that there is no love lost between Merkel, Draghi and Tsipras, although Merkel is known as an excellent mediator. An accommodation of their views is needed to ensure the future stability of the Eurozone.