GERMANY´S DEFENSE OF EURO HAS ITS LIMITS / THE FINANCIAL TIMES GLOBAL INSIGHTS ( HIGHLY RECOMMENDED READING )

Germany’s defence of euro has its limits

By Ralph Atkins in Frankfurt

Published: September 28 2010 16:53

Germany this weekend celebrates the 20th anniversary of the country’s reunification. The events of 1990 brought together not just West and East Germany; they also accelerated Europe’s economic integration. On one view, the euro’s launch in 1999 was the quid pro quo won by France in return for supporting Germany’s reunification – although this interpretation is rejected by German officials involved.


The episode will not have been forgotten by Wolfgang Schäuble, Germany’s veteran finance minister, as European Union authorities this week seek new rules to secure the euro’s future after the bruising crisis over public finances, which took the continent’s monetary union to the brink of disaster.


A close ally of Helmut Kohl, the German chancellor who saw his country’s destiny in leading Europe’s political and economic integration, Mr Schäuble was among those who oversaw reunification. Speaking last week at a Frankfurt conference organised by Die Zeit newspaper, he said Germany should again “take on the leadership”, this time to ensure the defence of the euro. Germany was among the biggest beneficiaries of monetary union, he argued; its generosity now would not be wasted.


His comments were good news for those who argue the 16-country eurozone will function effectively only when given a clear sense of direction by a dominant nation-state. The idea of a benevolent hegemon, in the geeky language of academics (appropriately, taken from Greek), is well established in economics.


Germany, as Europe’s largest economy, certainly has the economic power to take on such a role. True, its prospects hang largely on global demand for its industrial exports. But it recovered rapidly from last year’s near 5 per cent fall in gross domestic product.


What is less clear is whether Germany can offer the leadership the eurozone wants, or needs. Mr Schäuble does not favour imposing German policies on other countries. Instead he argues for a system in which policy rules are agreed by eurozone members – and then adhered to firmly. Germany’s role would then be to lead by example, by always following the rules. A big regret of Mr Schäuble is that five years ago Germany was flouting (with France) the eurozone public sector deficit limits set out in its stability and growth pact.


Germany’s focus on a strictly enforced “rules-based” system has fans at the European Central Bank in Frankfurt. But in France there is a tradition of more active, discretion-based policymaking, and Europe, being Europe, could not have just one hegemon. Unlike Germany, France has less historical difficulties in telling others what to do.


Nor is it clear that Mr Schäuble can persuade Germans to bear the financial costs that benevolent leadership would entail. Under the D-Mark, the Bundesbank was famously indifferent to the global impact of its monetary policy. This year’s eurozone financial crisis was exacerbated by delays in securing Berlin’s agreement for rescue packages. Media images of Greeks lazing while Germans had knuckled down to more austere times built popular opposition to the idea of a “transfer union” in which richer countries help poorer neighbours – although that is, in practice, what the EU is already.


Even Mr Schäuble sees limits to Germany’s munificence. Berlin argues that the life of the emergency European financial stability facility, set up in May, should not be extended beyond the agreed three years. Without a deadline, countries would have less incentive to implement reform, the finance ministry argues.


But leaving the eurozone without a safety net would be a high-risk strategy. Projections of likely debt levels suggest that by 2013, the risk of a eurozone country requiring a bail-out will not have gone away. Jean-Claude Trichet, president of the conservative ECB, argued in the European Parliament this week that a rescue mechanism should remain in place. Germany, however, would want to impose tough conditions on rescued countries, including the threat of insolvency – not necessarily a leadership style that would build confidence in the euro project.

Copyright The Financial Times Limited 2010.