WE CAN´T ALLOW A SECOND LEHMAN BROTHERS / DER SPIEGEL ( A MUST READ )

 

07/04/2011 12:33 PM

German Finance Minister on the Euro Crisis

'We Can't Allow a Second Lehman Brothers'

German Finance Minister Wolfgang Schäuble: "If we are going to have a common currency, we also have to be able to defend it."

Last week, Greece passed strict austerity measures and is out of immediate danger of insolvency. For now. SPIEGEL spoke with German Finance Minister Wolfgang Schäuble about what happens next, whether a Greek default is inevitable and how dangerous the debt crisis is for democracy.


SPIEGEL: Minister Schäuble, 15 years ago, a leading German politician wrote a book in which he predicted that the euro would no longer allow countries belonging to the European common currency the luxury of "relapsing into comfortable debt creation." Do you have any idea who made this prognosis?

Wolfgang Schäuble: I have an idea, but I'm sure you're going to tell me.

SPIEGEL: It was the then-floor leader of conservatives in parliament, Wolfgang Schäuble.

Schäuble: At the time, I was expressing an expectation that many held -- and current tendencies have confirmed it. In the case of Greece, we are currently seeing that the currency union doesn't allow its member states to pursue unsound financial policies for extended periods.

SPIEGEL: But, in the case of Greece, we have also seen that politicians have ignored such problems for years. This is now forcing them to break promises that they made in European Union treaties stipulating that Germany wouldn't be required to cover the debts of other member countries. Has the euro lost its credibility?

Schäuble: If we are going to have a common currency, we also have to be able to defend it -- and to do so in a way consistent with EU treaties. We've managed to do that: The euro is stable, and an increasing number of countries are denominating their financial reserves in the euro not least because of the high degree of faith they have in it. Incidentally, our goal in helping is not to cover the debts of others. More than anything else, we are helping in our own interest.

SPIEGEL: Still, taxpayers once again make billions of euros available to Greece, even after the EU and the International Monetary Fund (IMF) put together a €110 billion bailout package for Greece last year. Can you promise Germany this will be the last aid package?

Schäuble: We always resisted the early, simplistic notion that everything could be taken care of with a single payment to the Greeks in 2010. We said from the beginning that this was a complex challenge that would need a plan and would take time. Because we were aware of the size of the problem, we said early on that a lasting mechanism for overcoming the debt crisis had to be created. The European Stability Mechanism (ESM) is now there and is being ratified. But it won't take effect until 2013. So we need an interim solution, and that's what we're doing now.

SPIEGEL: Most experts doubt that the interim solution will work. They've concluded that Greece ultimately won't be able to avoid having to restructure its debts. Do you see things differently?

Schäuble: Absolutely. The program for Greece will become viable once Greece has implemented all the measures it has agreed to. That's not just my opinion; it's also shared by the IMF, the European Central Bank (ECB) and the European Commission. I have great respect for the way the people of Greece have approached this exceptional challenge. It won't be easy, but the Greeks have resolved to follow this path. And I'm convinced that they will do everything possible to work their way back out of this predicament.

SPIEGEL: Your views put you in a minority. Greece will soon have to spend a 10th of its gross domestic product on interest payments alone, and the country's economy is not competitive. How do you intend to solve these problems?

Schäuble: Greece has considerable potential when it comes to bolstering its market competitiveness. Just look, for example, at the share of the Greek economy that is controlled by the state -- it's almost as large as it was in formerly communist countries. If Greece were now to privatize state-owned companies on a massive scale, it would not only bring in money to state coffers, it would also liberate major growth forces. We Germans in particular know what is possible when a country undertakes genuine structural reform.

SPIEGEL: At the moment, though, the EU is mostly demanding austerity measures from Greece. Doesn't the country need a kind of EU Marshall Plan to get back on track to economic growth?

Schäuble: What you call it isn't so important. The crucial factor is for the EU to be more willing than it has been to support Greece in generating growth. When my Athenian counterpart makes his upcoming trip to Berlin, I'll be talking with him about how we can move this process forward. Doing so also entails considerable tasks and opportunities for the German economy.

SPIEGEL: None of this will help as long as Greece is being crushed by its enormous debt load. Wouldn't it be better if the country just conceded it is broke and asked its creditors to liberate it from part of the debt burden?

Schäuble: It's our responsibility to prevent things from escalating to crisis levels. If we don't do that, the crisis could spill over into other euro-zone countries, which would have unpredictable but thoroughly daunting effects on banks, the real economy and possibly the entire financial system. In any case, that's the fear of the European Central Bank; as finance minister, I have to take this into account.

SPIEGEL: Even Peer Steinbrück, your Social Democrat predecessor as finance minister, believes that the consequences could be controlled if Greece were to declare national bankruptcy.

Schäuble: But Mr. Steinbrück also believes that I should make policy in close consultation with the ECB. Those two things don't go well together because it is precisely the ECB that has long been warning of the incalculable and dramatic consequences that would follow a Greek declaration of national bankruptcy. We can't allow a second Lehman case on the financial markets.

SPIEGEL: The comparison doesn't really work. In the case of Lehman Brothers, no one new exactly the bank's reach. But, in the case of Greece, it's widely known who the creditors are. Politicians would only have to signal that they would stabilize endangered banks in an emergency.

Schäuble: Of course, as a responsible government, we're preparing ourselves for the unlikely event that things defy all expectations and Greece actually does fail to make its payments. Were that to happen, we'd try to avert uncontrolled developments. However, it would be completely wrong to cavalierly force Greece into insolvency. The risks for the Greek economy and the danger of infecting the financial markets would simply be too great.

SPIEGEL: The beneficiaries of your policies are international speculators. During the financial crisis, they were able to count on having the state buy up ailing banks in danger of collapse. They can now count on taxpayers financing countries whenever they go bankrupt. Where will this end?


'Politicians Are Not Prisoners of the Financial Markets'

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Schäuble: You have it wrong. Political leaders have long since reacted. That's why we created a mechanism for the euro zone that will, beginning in 2013, force private creditors to share in the bailout costs for a sovereign debt crisis -- though hopefully the stricter stability pact will make such a crisis difficult to imagine. And that's why, when it comes to the current aid package for Greece, we've made sure that the affected banks and financial institutions are willingly playing a role.

SPIEGEL: That's hardly more than window dressing. Originally, you wanted the private sector to contribute a figure in the tens of billions. But now that figure is only €2 billion. You call that a success?

Schäuble: Of course that's a success. We want to attain a substantial amount on the European level. You, on the other hand, are speaking about the figure that the German financial sector pledged last Thursday, a number which encompasses the bonds it has that will come due by 2014. The rest will come from other countries in Europe and from international investors. What's more, with my suggestion, I took into account the fact that know-it-all journalists would later accuse me of not having gotten what I wanted. A few months back, no one would have seriously believed that we would have gotten any kind of private-sector participation at all.

SPIEGEL: The state will guarantee a considerable proportion of this supposed participation. How are the banks really making sacrifices?

Schäuble: That's not correct. The contribution from the private financial sector will be completely self-financed -- and without state guarantees. But it's also correct that German banks and insurance companies have made it clear to me that their participation cannot be allowed to lead to any disadvantages vis-à-vis their European competitors.

SPIEGEL: One more time: In return for having agreed to hold on to their bonds for a longer period, banks will be allowed to charge extremely high interest rates while also getting state guarantees. It would be hard to demonstrate more clearly that the speculators are the ones setting the conditions.

Schäuble: Politicians are not prisoners of the financial markets, but they can also not do or allow whatever they please. There is naturally much exaggeration on the markets. That's why I say that, without the participation of the private sector, the legitimacy of the social market economy and the democratic order is at stake. These are not small things. For this reason, in recent months I have been engaging in an intense discussion with Jean-Claude Trichet ...

SPIEGEL: … the ECB president, who doesn't think too highly about rules forcing private creditor participation.

Schäuble: We have to be careful to make sure that people have the feeling that things are still somewhat fair.

SPIEGEL: Both debtor and creditor countries are experiencing the opposite. In Greece, the government is complying with the cost-cutting diktats coming from Brussels; in Germany, the parliament is signing blank checks for future bailout efforts. Do you think that the euro bailout could somehow threaten democracy?

Schäuble: Your description of blank checks and the like is off the mark. But it is correct that we need to be careful. Not only in Germany, but in all countries with good credit ratings, governments face the problem of having to explain to their people why it's necessary to provide Greece with assistance.

SPIEGEL: Perhaps people would have a bit more understanding if you would finally just come clean and admit the bitter truth: that Germany and other European countries will have to transfer a lot of money to the Greeks for a long time, and that they will never see most of that money back.

Schäuble: No. Greece must now turn the page and implement an extraordinarily ambitious austerity program. There's no denying that it's difficult. If you adjust the figures to German terms, these cuts would amount to €400 billion. That would be more than the volume of the entire federal budget. But it's the only way to make up for years of neglect.

SPIEGEL: No one seriously believes that Athens will succeed. Why don't you just tell people the truth? Germany is part of a currency union and benefits from it. But the price associated with that is having a transfer union in which economically stronger countries make payments to the weaker ones.

Schäuble: I won't use the phrase "transfer union" because it's simply not applicable. Still, it's true that any community can only function if there are mechanisms in place to allow for a certain degree of equalization. That's why we have the structural funds in the European Union. In a smaller community, people are more willing to make these kinds of payments than they are in a larger one. We can already see that from the equalization payments among German states, a system which has long been controversial.

SPIEGEL: Parliamentarians belonging to Chancellor Angela Merkel's governing coalition have tired of signing on to more aid packages. The Bundestag, Germany's parliament, now wants to have a larger role in the permanent bailout fund.

Schäuble: Whenever an indebted country is newly admitted into a program, the Bundestag will be involved. The government is currently discussing with parliament which form that involvement will take. But we have to keep an eye on what's happening on the financial markets and how quickly it's happening.

SPIEGEL: If Germany expects Greece to take significant belt-tightening measures, doesn't Berlin have to set a good example itself? Are tax cuts in Germany -- currently envisioned for 2013 -- even imaginable under these circumstances?

Schäuble: On Wednesday, we will adopt the federal budget for 2012 in the cabinet. Then everyone will be able to see the figures. They show that, despite all the success of our cost-cutting efforts, we still have a long way to go before we can comply with the rules of the (constitutionally anchored) debt break beginning in 2016. Even if we take on less than €30 billion in new debt in 2012, it will still be added to the roughly €1.3 trillion in debt that the federal government already has. I would advise anyone who sees an incredible amount of leeway given the good tax revenues to be careful.

SPIEGEL: Philipp Rösler, Merkel's vice chancellor and head of her junior coalition partners, the Free Democrats, sees things differently.

Schäuble: No. The FDP head, who is also the economics minister, has very clearly stated that budget consolidation has priority. If we have any wiggle room after that, we will use it.

SPIEGEL: In light of the euro crisis, wouldn't it be better to enter into a ruling coalition with the center-left Social Democratic Party (SPD)? The pairing worked well during the financial crisis.

Schäuble: No. We have enjoyed major successes with the FDP that would not have been possible with the SPD.

SPIEGEL: We find it a rather surprising that you would say that. When we think of the current coalition, we tend to associate it with endless internal strife, controversies and policy making in response to survey numbers.

Schäuble: It is true that we have some shortcomings in the eyes of the public, perhaps even major shortcomings. Yet, this government has enjoyed some successes: Just look at developments in the economy and the labor market! Even our esteemed American friends have come to acknowledge this success. When my US counterpart was recently here, he said that he was now trying to make US finance policy "more German-like."

SPIEGEL: Minister Schäuble, thank you for speaking with us.
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Interview conducted by Michael Sauga and Peter Müller
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Translated from the German by Josh Ward