Merkel’s sovereign remedy

Britain and Germany agree about the EU’s economics – but they’re still headed for an irreconcilable clash

17 November 2012

‘Europe is speaking German now,’ said Volker Kauder, parliamentary chairman of German Chancellor Angela Merkel’s Christian Democrat party, about a year ago. He was urging Britain to back Merkel’s plans for saving Europe’s rickety banks and state budgets. Last week, the Chancellor herself arrived in London to dine with David Cameron and deliver the message in person.

Cameron is in a tricky spot. The summit to determine the EU budget for the next seven years will be held on 22 November. A coalition of opportunistic Labour MPs and dug-in Tory rebels has just passed a non-binding amendment in parliament urging that the government accept nothing less than a cut in real EU spending. Cameron has tried to win himself a bit of wiggle room. ‘If there isn’t a deal that’s good for Britain,’ he has said, ‘there won’t be a deal.’ But Merkel wants to pin him down. ‘One can be happy on an island,’ she said at the European parliament in Brussels before she arrived in London, ‘but in this world they can’t be happy on their own any more.’

For Tories, a productive relationship with Europe’s leaders has always seemed to depend on breaking parliament’s attachment to its ancient sovereignty. If you are being told to throw away the most precious treasure you have, you are either reading the gospels or being played for a fool. Merkel, as it happens, is in a similar fix. She faces her own rebellion in the Bundestag, Germany’s lower house, where Eurosceptic Christian Democrat renegades, two dozen and growing, have deprived her of partisan majorities on votes involving the euro bailout. Few of them object to Europe in principle. It’s just that there have been too many bailout votes, and Germany’s liabilities now stretch into the hundreds of billions. The German high court insists that funds can be appropriated to bail out foreigners only by a vote of the Bundestag. A September poll on the euro in the newspaper Die Welt found two thirds of Germans wish they’d never joined.

Merkel is thus caught in a tug-of-war between German voters and various Eurocrats, bureaucrats and kleptocrats abroad. The voters, just like their British counterparts, want to make sure she doesn’t send any more of their money abroad than is strictly necessary. Their idea of how much is strictly necessary is zero. European officials, on the other hand, are intent on reminding Germany of its debt to history, which they would prefer to collect in cash. Merkel faces an election next September or October against the Socialist Peer Steinbrück, who was her finance minister when Socialists and Christian Democrats governed in a grand coalition. Steinbrück is a protégé of Helmut Schmidt, and is similarly at ease talking and thinking about economic concepts. That Steinbrück agrees with Merkel on most euro matters is both his strength and his weakness. A recent Emnid poll showed Merkel would thrash him, 51-26 (61-18 in the former East Germany), if elections were held today, even though the public trusts Steinbrück more on the economy.

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The big difference between Merkel and Cameron is that, for now, Merkel has more to fear from Brussels politicians calling her a bad neighbour, or Greeks marching through Athens wearing pickelhauben and Hitler moustaches, than she does from an uprising among voters. She is mixing voter-pleasing rhetoric about fiscal responsibility with indulgence to those who fail to practise it. The Socialists are trying, earnestly and in vain, to convey this point to the electorate. ‘Germany is going to incur more debt in the Greece affair,’ said a frustrated Steinbrück at a special Bundestag session on the euro crisis in mid-October, ‘why don’t you just come out and say it?’ Party chairman Frank–Walter Steinmeier complained in the same debate, ‘You haven’t drawn a single red line that you haven’t crossed within six months.’

Merkel is not too far from Cameron in this respect. Britain and Germany do not have radically different ideas of the European economy, in the way Britain and France did when Jacques Delors was shaping it. ‘We know from our own experience,’ Merkel said in October, ‘that only by reforming the labour market can we get growth again.’ When the wheelchair-bound finance minister Wolfgang Schäuble came to meetings with George Osborne in London in late 2011, one aide was struck by the similarities in the two ministers’ economic philosophies. Both were ‘students of Rogoff’ — more specifically, of the lessons laid out in Carmen Reinhart and Kenneth Rogoff’s history of financial crises, This Time is Different. And both were interested in ‘Ricardian equivalence’, the idea that economic stimulus never works as well as envisioned because investors and consumers, knowing the government must borrow to stimulate, cut their own spending to prepare for higher taxes down the line.

What divides Merkel’s crowd from Cameron’s is not their economic worldview but their experience of history. Schäuble was the heir apparent to Helmut Kohl until he barely survived an assassination attempt in 1990. Like Kohl he is a conservative who feels that, in the wake of Germany’s Nazi past, neighbourliness is the highest form of German patriotism. Good for Schäuble. The Germans have stirring, generous, romantic ideas of what the euro represents. These ideas, though, are occasionally wrong. Last winter I asked a senior Bundestag member, a euro supporter, what Germany was getting out of the single currency. ‘No Wall,’ he said. ‘Sixty years of freedom and peace.’ It was hardly worth reminding him that the Berlin Wall not only came down before the euro, it came down before the Maastricht treaty that envisioned the euro. Merkel, although trained as a physicist and possessed of a steel-trap mind, speaks of the euro in similarly treacly ways. ‘At its heart, the crisis of the euro is a crisis of trust,’ she said recently. But she thinks ‘trust’ is something vaporous and subjective, like a whimsy. Investors see it as something -physical and verifiable, like the density of a gas.

Europeans have never really been able, even after long explanation, to understand that the essence of British Euroscepticism is constitutional, not economic. One of the crazier aspects of the run-up to this European summit is the articles in various continental publications suggesting carrots in exchange for which parliament might allow an increase in the EU budget. A salary freeze for Brussels officials, perhaps? New EU-funded programmes in the UK? This approach works where the argument is over costs. But in Britain the argument is over sovereignty. A bigger budget will allow the EU to provide what Walter Bagehot called the dignified part of government. A smaller budget simply means charging Britons a bit less to take their sovereignty away.

Germany, however, lacks sovereignty to begin with. For historical reasons, it has developed the habit of not governing itself, and its neighbours are shocked when it even makes the pretence of doing so. (When Gerhard Schröder, for instance, said during the Iraq war that Germany’s foreign policy would be made ‘in Berlin, and only in Berlin’.) Germany cannot act forcefully on the international stage. What it can do is guard vigilantly against people picking its pocket, something of which the French have given them ample experience over the decades. That is why the country is sceptical about eurobonds, debt instruments that would make all Europeans in principle — and Germans in practice — responsible for debt run up in any European country. As a matter of constitutional theory, Germany’s opposition is warranted. Since Germans did not incur Greek or Spanish or Italian debt, they cannot pay it. That would be taxation without representation. These are the sort of airtight points that Merkel tends to make at European summits shortly before she makes concessions.

Merkel was quoted in one recent newspaper profile as saying that eurobonds ‘would turn mediocrity into Europe’s yardstick’. She constantly suspects economists and other interlocutors of trying to trick her out of her debt-cutting virtue. The key to her majority is that her party abhors all ‘mutualisation’ of debt in principle but consents to it in practice. Her opposition has never been able to get this point across. Green leader Jürgen Trittin has recently accused her of approving eurobonds ‘through the back door’.

In June, Merkel agreed to use the European Union’s rescue fund, the European Stability Mechanism (ESM), to recapitalise banks. This autumn, though, she and the leaders of other triple-A-rated countries tried to renege on the agreement. Yes, they would bail out troubled banks, but not banks that have already been bailed out. That dampened Irish hopes of getting out from under a mountain of debt. Evidence of the rapport the Irish business press has developed with Mrs Merkel includes this editorial in Dublin’s Sunday Business Post: ‘The politics for our government of putting money into our banks is bad enough — imagine how it plays in Westphalia or Munich.’ A cold-eyed and true assessment.

Germany wants to provide other governments with solidarity, not welfare, even if, to Anglo-Saxon ears, the former is just a euphemism for the latter. The upshot of the euro crisis will be some kind of fiscal union, but what fiscal union means is not clear. Germany believes it means sending tax inspectors to Thessaloniki. Brussels believes it means sending cheques to Thessaloniki. In the October parliamentary debate on the euro, Merkel said: ‘We are of the opinion — and I speak for the whole of the German government on this — that we could go a step further by giving Europe real rights of intervention in national budgets.’ That is why Anglo-German relations are in for a rough patch. Some EU countries will be able to swallow this. Britain will not be one of them. It is the newest tragedy of German history that the rules of 21st-century sovereignty are being set largely by a country that has little sovereignty to lose.

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  • Douglas Carter

    The theoretical kernel of a single european currency goes back essentially to the start of the project itself – which is what Merkel meant by the phrase ‘if the Euro fails, Europe fails’. It was never an optional bolt-on thought of by idealists at a later date.

    Good article tho’ – although Merkel’s painful nods to Cameron allegedly for his benefit still stick out like redundant sore thumbs poking from a wedding cake. Emotive terms like ‘alone’ are still preposterous misdirection. The more recent concept ‘Europe is leaving Britain’ is now more accurate, and this is Cameron’s and Merkel’s greater success – that they have been singularly lucky that the real issues have not even scratched the front pages of the british press yet. That Merkel is coalescing plans to create an inner-tierouter-tier EU. The inner tier obviating the fullest irreversible integration – the real inception of a putative USoE. The outer tier yet to be defined. No politician in the UK would be able to get membership of that inner-tier through Parliamant, and membership of the outer tier will never be politically sustainable.

    These things will also become to maturity before a 2015 election. Finally, there’s no way the Westminster set will be able to conceal EU policy behind the event horizon of a general election and a referendum they have no intentions of holding. The decoupling of the UK from the EU is now inevitable. Merkel and Cameron know that, and they might as well commence the articles and administrations which ensure that divorce is as smooth and painless as possible.

    • dalai guevara

      Again, a rather sweet attempt in diversion.

      No one cares that you cannot see the common good the EU arrangements have brought to the UK, the good the Treaty of Rome has brought us, the hand rubbing of the rent seekers that it has led to, allowing for the import of cheap labour from Portugal, Poland and soon Bulgaria whilst ripping off the same set of immigrants in a ‘shed with bed scenario’. These rent seeker NEED immigration from the EU and other places to keep their rent seeking ponzi scheme going. It’s what fuels it. Needless to say these rent seekers are not socialists.

      Now, even if we ignored the rent seekers and focussed on the rest of our economy, we would see that we run a sustained trade deficit with the rest of them. In an economically decoupled scenario, we would be required to negotiate import/export quotas/ duty etc. Are you prepared to forfeit your choice with respect to which cars you drive, which medical, printing or lift technology you can or cannot import, simply as you might find you will no longer be in the position to afford any of them due to a change in the market environment?

      You clearly have not thought it through what it would mean to economically decouple from Europe, ‘your’ main trading partner today – all whilst simultaneously engaging in a financial and tax war with the US (or what would you call it what goes on right now?).

      The more I think about it, you are making a case for a fight on two fronts and claiming you would emerge victorious – and we know how that worked out for some.

      • Douglas Carter

        …’you are making a case for a fight on two fronts and claiming you would emerge victorious’…


        No one cares that you cannot see what is actually happening. That’s the actuality. The sentiment and emotion is irrelevant. Merkel is hosting processes which will obviate the construction of a new treaty by 2014. The two-tier EU is actually under planning. If you can’t see that, or refuse to permit yourself to see that manifest, physical fact, that’s your problem.

        Being that you entitle yourself to build pies in your sky on your neglect is simply a more distant adjunct of the problem you have crafted for yourself.

        The UK will not, cannot, join a core EU which compels full p0litical, economic and international integration. Again – that’s a fact. Neither can France or Holland for that matter, but it’s academic. The EU as is currently constituted will no longer exist in a few short years. Your lofty, but hollow comments will do nothing to aver from that plain truth.

        • dalai guevara

          Indeed, just like the ECSC only existed a few years, to be outlived by the EEC, which only lasted a few years and was then superseeded by the EU and so on.

          Not joining a fiscally integrated Europe does not mean you need to leave the EU- it’s as hollow as that, my friend. Sweden and Denmark haven’t got the problem you have, neither has Poland. Perhaps get over your pompous bully type ‘Farangeism’ and start talking some sense? And stop implying that you were ‘special’, because

          a- you are not
          b- you have heard this joke before haven’t you, ‘special needs’ can be addressed at an early age.

          • Douglas Carter

            I’ve only followed your personal, preferred tone of retort, so if you think I’m ‘bullying’, then I’d suggest looking to the mote in thine own eye.

            In the UK political culture, membership of the full integration zone will not be possible. I see you accept that.

            In the UK political culture (as in not Danish, Swedish, Austrian, Spanish… etc – they all have unique facets and can answer for themselves) membership of an outer zone will not be politically sustainable. The treaty as will be coming will be partnered by months, if not years, of painful negotiation. The negotiation is coming, France and Germany will both contrive special case legislation to suit themselves, as has been the historic norm. As will the UK.

            If the four horsemen of the apocalypse also inhabit your fantasy calamity, then by all means furnish them with the dialogue you wish them to elicit. It won’t make your curious dream world any more real.

          • dalai guevara

            Fine, let’s refrain from engaging in a discourse in a gung-ho matter then, shall we? You OTOH seem to have accepted that a two tier Europe continues to be a possible option – that not being difficult as we are in fact already firmly embedded in a two tier Europe today. My position remains a position which reiterates that not joining a fiscal union (we do not intend to) does not mean we could not remain in a EU type arrangement with the rest of the continent. I frankly do not see where exactly positions have changed.

            You have yet to the make the case of how a Brexit would play out. Off you go: I am all ears.

          • KeithMcLennan

            “My position remains a position which reiterates that not joining a fiscal union (we do not intend to) does not mean we could not remain in a EU type arrangement with the rest of the continent. I frankly do not see how exactly positions have changed.”

            So, Mr guevara’s position (which “remains a position”) reiterates that NOT joining (we do NOT intend to) does NOT mean we could NOT remain in a [sic] EU type arrangement.

            What could be clearer than that?

          • dalai guevara

            I realise there needs to be a minority. Now go pay off your home grown 2011/12 QE debt (£175bn). That could have paid for Europe until 2059.

          • KeithMcLennan

            Well, dalai guevara, I’m not British, so I’ll have to leave the QE debt to you. Although your reference to “the rest of the continent” rather suggests that you aren’t British either…

          • dalai guevara

            Rest assured, the Treaty of Rome is on the side of the adaptive…

          • KeithMcLennan

            “My position remains a position which reiterates that not joining a fiscal union (we do not intend to) does not mean we could not remain in a EU type arrangement with the rest of the continent. I frankly do not see how exactly positions have changed.”

            So, Mr guevara’s position (which “remains a position”) reiterates that NOT joining (we do NOT intend to) does NOT mean we could NOT remain in a [sic] EU type arrangement.

            What could be clearer than that?

        • NeilMc1

          Cameron is signed up to a federal Europe and will do everything to bring it to pass. All three parties are Euro Federalists. If you vote for any of them or trust any of them they will sign your country away. It will take direct action to stop Cameron and the rest of them.

  • http://jedibeeftrix.wordpress.com/ Jedibeeftrix

    “Europeans have never really been able, even after long explanation, to
    understand that the essence of British Euroscepticism is constitutional,
    not economic.”

    100% correct.

    • http://twitter.com/EdTho Ed Tho

      Not correct, like much else in this article. If their way ‘works better’- ie, produces more true economic benefit- then no self-respecting conservative could refuse it. However, the nation of shopkeepers knows better than the corporatist cartelists, and that’s why we are as we are. Germany has abundant sovereignty expressed in its courts, its Bundesbank and its Lander. That we overlook it is our weakness. Any train needs a driver and Europe has seen that it´s safer to give a German the controls. That’s why the former Bundesbank controls the Central European Bank, whichever lackeys actually front it. Why does it always feel as if we are in the cheap seats? Perhaps because we are. Do not underestimate the will to power of a united Germany. As CC rightly mentions, the East Germans are Merkel’s biggest supporters. United Germany is not the same as the divided one. They emphatically do do unifications and they are engaged in a business and businesses which they know.

  • Mike Waller

    When will the rest of Europe wake up to the obvious solution to the Euro problem? Get Germany to leave along with any other country brave enough to share a currency with her. A significant part of Germany’s huge economic success during the era of the Euro came from the weaker countries dragging its value down thus enabling Germany to sell its goods at lower prices on the world market.

    Now the chickens have come home to roost and Germany doesn’t like it. However were she out of the Euro, its value would plummet and that would enable the weaker economies to get back into business. Germany’s New Mark would, of course, go through the roof, but such is her productivity that it would be a problem she could deal with far, far more effectively than can the likes of Greece in the present situation.

  • Ariadne

    ‘Europe is speaking German now’ – I believe he said it in English.

  • paulus

    Its like some terrible dance of death being played out in front of our eyes. When the German people wake up and realise they have assumed responsibility for a trillion euro debt, they wont be too happy.

    They made the goods the other bought and now they are invited to pay of the bill, no wonder they are always invading everone else.

    The German people didnt owe the rest of Europe anything, they didnt owe the French anything, France was relatively unscathed by the Germans thanks to the fact there was more fascists in France than in Germany.

    The Germans are no good at banking, how do they even begin to think they can regulate it.

  • http://twitter.com/henrymcg henrymcg

    “Europeans have never really been able .. to understand that the essence of British Euroscepticism is constitutional, not economic”

    Well I’ve been in this conversation. I told a German that we valued our independence very highly. He seemed to shrug and say “well then vote your way out of the EU then”. Looks like pretty much the same style of negotiation here, ie: a kind of bullying.

  • martin morrow

    “Europeans have never really been able, even after long explanation, to
    understand that the essence of British Euroscepticism is constitutional,
    not economic”

    Quite, but then nor have many of our own politicians who have been brought up aspiring to power and money first, and country a far second.

  • http://twitter.com/Lily_Dubstep Lily Alldub
  • Massel Tov

    @liliy alldumb
    the makers of germanywatch.blogspot are psychopaths.
    like the most of their readers…

  • boonteetan

    EU has been at best a convenient gathering of nations with
    diverse visions and multifarious histories. It is amazing that it continues to
    survive. With relentless economic turbulence and political quibble still
    bashing Eurozone, EU’s days must be numbered.

    (btt1943, vzc1943)

  • Tony ten Kortenaar

    The original idea was a free market and that where it should have stayed ,politically Europe is and will be a mess !

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