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Thursday, June 28, 2012

No, Germany has not blinked first over debt-pooling…

People have once again been getting rather excited over a media report today. This time it is an interview which German Finance Minister Wolfgang Schäuble gave to the WSJ in which he said:
"We are willing to go as far as we need to in order to get a sustainable agreement in Europe,"
The WSJ took this as such:
His comments indicate that Germany is more flexible than many observers in Europe think after Chancellor Angela Merkel told German lawmakers early this week that there would not be full mutualisation of European debt in her lifetime. German lawmakers who were present have said that Ms. Merkel's comment was made in jest and that media have exaggerated its significance. Mr. Schäuble's comments seem to support this view.
Now, we don’t dispute that Merkel likely made her comments mostly in jest and that people also read too deeply into them. But equally, Schäuble's comments don't mark a significant switch in the German position – not least because the German Finance Ministry has already denied that to be the case, but also because in the very same interview Schäuble also said:
"We have to be sure that a common fiscal policy would be irreversible and well-coordinated. There will be no jointly guaranteed bonds without a common fiscal policy."

"We cannot separate liability (for public debt) from the competence to decide on fiscal policy. This would be to ignore the most basic lessons of the crisis. As soon as we have a joint EU fiscal policy, we can consider joint liability—the sequencing is key."
That all sounds very par for the course in terms of the German government’s approach to debt pooling. The important part here is the sequencing. Germany has always said it will support further integration and even potentially some form of debt pooling, but only if it first gets strict budget rules and clearly enforced fiscal constraints to ensure any risk sharing is not taken advantage of. Note: that's 'see you in court' enforced - not the current half-baked fiscal rules.

Clearly, the kind of institutionalised budget discipline that the Germans have in mind is hugely difficult to achieve. Remember, Van Rompuy's proposal for fiscal and banking union was cut it in half before publications - at the behest of the French - precisely because it included too strong language on budget discipline and loss of sovereignty over spending decisions. EU leaders have consistently failed to institute binding budget rules - think the original Stability & Growth pact, the watered down fiscal treaty, missed Spanish targets (with Madrid failing to control spending even in its own regions) etc. etc. Therefore, as we pointed out in a recent briefing, we think that to actually get by the first step of Germany's vision of a more integrated Europe will be hugely challenging.

Furthermore, as we reported this morning, this sequencing is also one of the dividing points between the German and French governments. France wishes to see risk sharing and debt pooling as soon as possible with political union later – i.e. debt mutualisation now (either directly or through the ECB) with greater conditions and oversight later on. So although they do sound as if they agree on the ends – more Europe and shared commitments – France and Germany very much differ on how to get there and in what order.

We’d also note that in terms of the "willing to go as far as we need" comment, German ministers have said similar things before, i.e.:
"We need more Europe…We do not only need a currency union, we also need a so-called fiscal union - that is, more joint budget policy."
“It is small-minded to reduce Europe simply to questions of finance…We must have the ambition to do more than simply protect the status quo.”
Additionally, as today’s leader in Handelsblatt shows, aptly supported by the poll in today’s FT, Germany is willing to support more Europe but not at any cost and especially not without the right conditions and controls.

In other words, this game of chicken (as it seems to have been termed), still has a long way to run.


Anonymous said...

It's quite ironic that the biggest obstacle in Germany's plan towards further political and fiscal integration is Germany. Unless German politicians find a way to convince the German people to give up the Grundgesetz and adopt a new constitution by referendum, Germany's plan is more or less dead on arrival.

Rollo said...

You have to read today's Economist to understand how France is killing off its industry and making Eurozone recovery impossible. The Germans will not carry the French. The ship is sinking: we must get clear of the wreck to avoid being sucked down with it.

Anonymous said...

Rollo is quite right. Steer clear of the wreckage of the euro, then out of the EU altogether.