Germany Awakes. Rules of the Game Are Changing in Europe

At its spring summit, currently being held in Brussels, the European Union is expected to present a rescue package for Greece, consisting of a joint EU-IMF solution. However, even if the EU succeeds in finding a solution, the crisis surrounding the euro has revealed that Germany is no longer willing to put EU interests before its own.

This week, the euro fell to its lowest level against the dollar in ten months, and its lowest level ever against the Swiss franc. The crisis over the euro, triggered by the budgetary problems of Greece, one of the 16 countries which use the common European Union currency, is causing political tensions between the countries of the so-called eurozone. Meanwhile, the next domino seems to be about to fall. Earlier this week the international ratings agency Fitch lowered the credit rating of Portugal, another eurozone member and the home country of Jose Manuel Barroso, the president of the European Commission.

The leaders of the governments of the 27 EU member states are meeting in Brussels today for the second day of their spring summit. British eurosceptics have always considered the euro project an attempt to foster economic convergence and political union through monetary union a classic example of hubris; now, they regard themselves lucky that their country did not adopt the euro ten years ago.

Germany is refusing to bail out Greece. Earlier this week, Chancellor Merkel told the Bundestag that Greece should be expelled from the eurozone if its financial problems risk dragging the euro down. France and the European Commission in Brussels reacted furiously to this suggestion. Barroso dismissed Merkel’s words as “absurd.” Paris and Brussels insist that the EU come to the financial rescue of Athens. Since most of the money for a rescue operation will have to come from Germany, however, such a decision cannot be taken without Berlin’s approval.

Bullying Berlin does not seem to be a clever move. Merkel’s Bundestag declaration followed shortly after Greek Deputy Prime Minister Theodoros Pangalos had accused the Germans of exploiting the Greek debt crisis for their own financial and economic benefit. “By speculating on Greek bonds at the expense of your friend and partner, by allowing [German] credit institutions to participate in this deplorable game, some people are making money,” the Greek Socialist said. “A cheap euro makes the south of Europe suffer, while German exports benefit.”

Last month, Pangalos had angered the Germans by demanding that Berlin pay reparations for Nazi crimes. “The Nazis took away the Greek gold that was in the Bank of Greece and they never gave it back,” he said. The German Foreign Ministry responded that in 1960 Germany paid Athens 115m German marks in compensation for the Nazi occupation and that “parallel to this, since 1960 Germany has paid around 33bn marks in aid to Greece both bilaterally and in the context of the EU.”

The Germans no longer accept being required to be the EU’s paymasters to atone for their Nazi past. There is also an increase in euroscepticism in German public opinion. While Germany introduced austerity measures and trimmed down its welfare system, countries such as Greece refused to do so, relying on the fact that the EU (read: Germany) would bail them out when they got in trouble in order to save the euro.

In Europe, the political rules of the game are changing. An editorial in Wednesday’s Frankfurter Allgemeine Zeitung (FAZ), Germany’s most influential newspaper, drew attention to the fact that “The biggest member state, which has for so long silently been the guarantee of the EU, has now openly expressed that it is no longer prepared to pay any price for European unification. The present Euro crisis is more than a monetary matter. … The image of [Germany as] the paymaster of Europe, the caricature of the Brussels bureaucracy, and the growing displeasure with the loss of [German] Sovereignty has shaped a eurosceptic fundamental sentiment, into which the Greek debacle has landed like a bomb. No German government today can afford to put the European interest before the German interest, especially not in core issues as monetary policy. And even if it tried, it can reckon on being opposed in the German Constitutional Court.”

Since Germany does not want to bail out Greece, it has suggested bringing in the IMF. The Netherlands agree to this. On Wednesday, the Dutch Parliament said that aid for Greece should come exclusively from the IMF. This is unacceptable for France. President Nicolas Sarkozy of France said that there must be an exclusively EU solution. Most observers expect that the EU spring summit will present a compromise: a mix of IMF support and bilateral loans from EU member states.

In its monthly report the Bundesbank pointed out, however, that it is not the IMF’s job to help countries finance excessive budget deficits. “The IMF’s mandate stipulates that it may only use its foreign-currency reserves to bridge short-term balance of payments deficits,” the report stated.

The pressure on the EU leaders to reach an agreement is huge. It is the only way to lower the high interest rates which the Greek government must currently pay when it borrows money. This rate is twice as high as what the German government pays. An agreement is also needed to prevent a domino effect, which threatens to affect eurozone members Portugal, Spain and Italy.

The lowered credit rating for Portugal means that the country will pay higher interests when borrowing. Fitch lowered the rating because the Portuguese budget deficit is much higher than expected.

Meanwhile, with the house on fire, the internal squabbling about who will represent the EU on the international forum continues. The EU will be sending three different presidents to the next G20 summit: the government leader of the country presiding the European Council (currently Spain), European Commission President Barroso, and the permanent president of the Council, Herman Van Rompuy.



Don't be too optimistic

As we tend to say in German: "Never praise the day before the evening"

I am very skeptical whether Merkel has achieved anything beyond ensuring a win in the coming election in Northrhine-Westphalia with her "hard stance". In fact, different german newspapers have trumpeted either a success or a failure of Merkel's negotiations, according to their relationship with the media-savvy leader.

If anything, Germany might have gained the questionable benefit of a not-so-tight financial noose around it's neck. Hang it will! Our European friendsters in Brussels will see to it.

The climate for change has not yet fully developed in Europe. Germany's elite will do a lot more damage, before it is swept away (violently, as is the habit of us Germans). The German tends to suffer a long time the insolence of it's leaders, all the while slowly stewing in his own juice, building up dangerous levels of aggression. Let's hope for Europe and Germany, that this aggression can be focused on production, not destruction this time.

@ Reconciler

Congratulations for your honest, timely and correct analysis.
There will be violence all over Europe and it will start in the East of Europe, probably ignited in Eastern Germany.
The degree of violence will depend on the reaction of the scared socialists who will not understand the "red paradise lost" (again) and will blame the right (again).

Madame Non

I wonder if Maggae Merkel keeps her position when the United Kingdom gets bankrott, little time left for that, Darling.

RE: Germany Awakes

Despite German resistance to provide emergency funding to cover Greek government spending, it has supported the creation of a "European Monetary Fund", as well as IMF intervention in Greece.  I believe that instead of attempting to enforce fiscal responsibility in the EMU, or expel liabilities such as Greece, Germany should at least return to the Mark, if not leave the EU entirely. 


Germany needs to assert her interests rather than quietly underwriting Belgian and French ambitions.  Not only is France suggesting that Germany arbitrarily reduce its exports to France in order to improve its current accounts, but France may soon join the PIIGS and come to Germany hat in hand...

The eurozone is

The eurozone is unsustainable; too many different economies with varying degrees of productivity need different currencies. It is a modern tower of Babel.

Germany rediscovers the virtues of patriotism

Here it comes: Germany has rediscovered the virtues of seeking her national interest instead of bowing to the EU's every demands, and rescuing socialist oddities. It does not bide good for the EU, the behemoth's days are numbered, mark my words.