No fundamental change in eurozone policy after the German elections

Today we released an in-depth briefing on the German elections, and their implications on the eurozone. The top line: don’t expect any fundamental change in Germany’s eurozone policy after the elections.

Of the nine proposals being floated to pull the eurozone out of crisis, we expect clear movement in only one or two areas, including the most important but most unclear one: the proposal for a single eurozone resolution authority for banks.

Moreover, Germany is unlikely to depart from its emphasis on ‘sparkpolitik’ or austerity. Any change here will be largely superficial: a continuation of same policies wrapped up differently. This is based on Germany desire to ‘lead by example,’ and the broad support for austerity enjoyed among the German public.

The German insistence on structural reforms, and strong controls on taxation and spending of other eurozone states won’t change either. A government lead by Angela Merkel, could, however, push for a formalised “competitiveness pact” where by struggling eurozone countries commit to reforms  in return for aid.

The question of debt pooling will remain a contentious one  –  with the recent Open Europe/ Open Europe Berlin poll, conducted by YouGov Deutschland, showing that 64% of Germans are opposed to such a step. A debt redemption fund, as has been proposed by the influential Council of Economic Experts that advises the government, may be a possibility – however, this won’t be without opposition.

See our table below (click to enlarge) which breaks down and analyses the key eurozone policy areas on a party-by-party basis, detailing if we can expect to see movement after the elections:

Will the German Social Democracts come out in favour of debt pooling in the eurozone?

Last year we highlighted the German opposition’s somewhat ambiguous position on the hugely controversial proposition of debt mutualisation in the eurozone. However, with September’s elections rapidly approaching, it seems the SPD could have nailed their colours to the mast and have come out in favour, with their draft manifesto – launched yesterday by the party’s chancellor candidate Peer Steinbrück and party chairman Sigmar Gabriel (pictured) - claiming that the subject can “no longer remain taboo” according to Die Welt.

With the manifesto not yet publicly available (it has to be approved at the party’s national conference on April 14), we cannot be sure what form this would take – more limited mutualisation via a so-called debt-redemption fund or more extensive debt mutualisation via commonly issued eurobonds. With the German electorate reamining firmly against dept pooling, we suspect the former.

The party has also come out in favour of expanding the role of the European Commission into a ‘European government’ subject to control by the European Parliament and a second chamber where national governments would be represented, although it must be said that this concept has already been floated both by Angela Merkel and also by the ‘Future of Europe’ group chaired by Guido Westerwelle.

It will be interesting to see what effect – if any – this has on the SPD's electoral fortunes (we can imagine that the new 'Alternative for Germany' anti-euro party making this a big issue). At the moment the party is struggling to break through the 30% barrier in opinion polls and has been as low as 23% in recent weeks.

In addition to the dynamics of German domestic politics, from the perspective of the UK, this debate is both interesting and relevant given that any of the changes proposed above would require changing the EU Treaties, thereby giving the UK the opportunity of putting forward some reform proposals of its own, as suggested by David Cameron in his recent speech.

Barroso's Christmas wish list

Christmas is approaching and, in that spirit, José Barroso, the President of the European Commission, has written himself a wish list of presents for the EU member states (and particularly the Eurozone) to hand over. The Christmas wish list, or as Barroso puts it "A Blueprint for a deep and genuine EMU" is as follows:

For the next 18 months:

Wish number one: the "rapid adoption of current Commission proposals such as the two-pack and the Single Supervisory Mechanism" - i.e giving the ECB powers over eurozone (and perhaps other) financial supervision.
Wish number two: a eurozone "rebalancing" budget in addition to the EU budget. - more money.
Wish number three: a "Convergence and Competitiveness Instrument" for the eurozone - mutual contracts to enforce bailouts and deficits.
Wish number four: "external representation of the euro area in international economic and financial organisations and fora." - some more foreign postings.

And thinking ahead for next Christmas (next 18 months to 5 years):

Wish number five: deeper [eurozone] coordination in the field of tax policy issues as well labour markets
Wish number six: an "autonomous" and enhanced eurozone fiscal capacity that will  "rely solely on own resources" - a eurozone tax, budget and treasury- perhaps a financial transaction tax?
Wish number seven: a "power of intervention in the design and implementation of national fiscal policies"
Wish number eight: "The common issuance... of so-called eurobills", requiring a treaty change - but will the German taxpayer want to underwrite (and perhaps lose) money lent to Greece?

For the Christmas after that (for 5 years time):

Wish number nine: "extend the competences of the Court of Justice, i.e. by deleting Art. 126 paragraph 10 TFEU and thus admitting infringement proceedings for Member States or by creating new, special competences" - i.e further power over national economies.
Wish number ten: "a commensurate involvement of the European Parliament in the EU procedures. The European Parliament, and only it, is that Parliament for the EU and hence for the euro."

And this would leave you with Barosso's ultimate wish: "a banking union, a fiscal union, an economic union [and] as a fourth element, appropriate  democratic legitimacy and accountability."

German Foreign Minister Guido Westerwelle's response to the proposals was: “It is good that the EU commission is putting forward proposals for a stronger co-operation in the eurozone. But eurobonds, bills or any other form of joint debt liability in Europe are going in the wrong direction."

To many the proposals may seem alarming, but in truth, most of these proposals have been floating around for a long time. The novel aspect was the proposed time frame outlined by the Commission and combining them in a single vision. Notably though, many similar proposals by the Commission have resulted in very little, especially since the eurozone crisis has put an increasing emphasis on the intergovernmental decision-making found in the European Council.

Herman Van Rompuy's own list (expected at the December summit) which will probably be more modest and less eye-catching is likely to be more important simply because it more closely reflects the views of the key decision makers in the process.

Germany's Summer of discontent?

Over the last few weeks, a range of German policymakers have fired broadsides against further German involvement in the eurozone crisis, and against further aid to Greece in particular. Referring to September’s troika report on Greece, Michael Fuchs – the deputy parliamentary leader of Angela Merkel’s CDU party – yesterday told Handelsblatt that:

“Even if the glass is half full, that won’t be sufficient for a new aid package. Germany cannot and will not agree to that. We reached the point where the Greeks must show they are capable of delivering a shift long ago.”

Last week, Horst Seehofer, Prime Minister of Bavaria and leader of the CSU, the Bavarian sister party and coalition partner of Angela Merkel's CDU (which has been getting increasingly agitated by the eurozone bailouts), proposed a series of referenda:

"We must involve the people... First of all: on the transfer of important competences to Brussels. Secondly: on the accession of new states to the European Union. And thirdly: on German financial aid to other EU states."

In particular Seehofer cited debt pooling such as eurobonds or a debt redemption fund, adding that "with the CSU there won't be any United States of Europe".

Merkel's other coalition partner, the liberal FDP, is also stepping up its rhetoric, with its leader and deputy Chancellor, Philipp Rösler and also its leader in the Bundestag, Rainer Brüderle, saying they were reconciled with a Greek euro exit. Bavarian Economy Minister Martin Zeil has gone even further arguing that: 

"...a country needs to leave the euro, when it doesn't fulfil its duties. If necessary, two or more [countries] could leave." 

From the other side of the political spectrum, former German Finance Minister Peer Steinbrück (SDP) last month stated that:

"in certain cases, I have increasing doubts whether all countries will be able to be kept inside the eurozone (...) I can see how certain countries will be unable to close their competitiveness gaps [with Germany]"

However, the SPD have also recently publicly come out in favour of eurozone debt pooling - albeit it with strict conditionality in terms of national financial policy-making.

Otmar Issing, former chief economist of the ECB, added his voice to the chorus, saying some eurozone member states might have to leave:

 "Everything speaks in favour of saving the euro area [however] how many countries will be able to be part of it in the long term remains to be seen."

The question is whether all of this is rethoric, or the beginning of something else.

Bavarians are getting increasingly restless over eurozone bailouts

Debt-pooling goes down less well in Munich

Its not just Spain that has a problem with its regions. Over in Germany, Bavaria is getting increasingly angry over the additional burdens imposed on Germany as a result of the eurozone crisis - both via the existing bailout funds and possible future burdens via eurozone debt pooling. This is because in addition to its strong regional identity, it is the wealthiest of Germany's 16 states; a bigger burden on German taxpayers therefore equals a bigger burden on Bavaria.




The day after Moody’s placed Germany as a whole on negative outlook, it placed Bavaria and five other German states on negative outlook as well. While the German government reacted quite stoically – saying it had “taken note” of the decision – the response from Bavaria to its 'outlook downgrade' was far more robust. The state’s Finance Minister Markus Söder told Süddeutsche that:

"The Bavarian finances are in top condition, we are paying back our debts. I would expect us to win a gold medal.”

The state’s Prime Minister, Horst Seehofer argued that the decision "ought to send a warning signal to the rest of Europe". Both politicians come from the CSU, the Bavarian sister party to Angela Merkel’s CDU, which governs Bavaria with the FDP as its junior coalition partner. In the German debate, the CSU has taken the hardest line on Europe’s so-called ‘debt sinners’; yesterday Söder became their latest senior politician to explicitly call for Greece to leave to eurozone – in contravention of the government’s official position, while in an interview last week the party’s General Secretary Alexander Dobrindt said that:

"With Greece we have reached the end of the road. There must not be any further aid. A country which does not have the will to fulfil the conditions, or is not able to do so, must get a chance outside the euro”. 

However, it is not just Greece that has attracted the ire of the CSU – in the same interview Dobrindt laid into the opposition SPD and Green parties, describing their positions on the eurozone crisis as a “betrayal of German interests”:

“We will defend the bastion that is Bavaria against the onslaught of the left… The [upcoming regional and federal] elections will be hard clashes with the opposition parties over major social issues: the SPD and Greens want German taxpayers’ money in exchange for eurobonds. They represent the interests of the Socialist International and not those of German citizens. They are preparing the ground – together with the French President [Hollande] – for a ‘eurosocialism’. Their egalitarianism comes at the expense of Europe’s top performers [and will] threaten the prosperity of Europe.”

Dobrindt’s intervention is noteworthy because it is the first time that a senior mainstream politician has explicitly called for the eurozone crisis - and longer term questions such as eurobonds - to be made into defining issues in next year's elections. Until now, despite accusing Merkel's government of poor political management, the SPD and Greens have broadly taken the same structural approach to the crisis - i.e. bailouts and savings/reform packages, albeit with additional emphasis on 'pro-growth' measures. It will be interesting to see if and to what extent Merkel and the CDU will heed Dobrint’s call to adopt a tougher tone.

Bavaria’s position in Germany can be seen as a microcosm of the eurozone as a whole – together with neighbouring Baden-Württemberg they largely subsidise public expenditure in the Western Länder and the former DDR – the latter via a statutory ‘Solidarity payment’ on top of general taxation. Given that many Bavarians are unhappy with this arrangement - the state government recently launched a legal challenge - their resistance to funding another ‘solidarity payment’ – this time for the Mediterranean bloc – should not be underestimated. Earlier this month, Seehofer warned that:

“Eventually, a point will be reached when the Bavarian government and the CSU can no longer say 'yes' any more [and] the coalition has no majority without the CSU's seats.” 

While this is unlikely to happen any time soon, the CSU’s resistance will severely restrict Merkel’s ability to place further eurozone rescue related burden on the German taxpayers in the remainder of the current parliamentary session and beyond.

As Germany as a whole faces the question of how it will respond to the crisis in the longer term – with a range of options running from a break-up to more political and economic integration – expect Bavaria to be at the forefront of the resistance to the latter option.

The Karlsruhe factor, Part IV

Throughout the eurozone crisis, we have often highlighted the gap between the kind of ‘shock and awe’ decisions expected by financial markets, and what national democracies are able to deliver. Nowhere has this been more evident than in the on-going constitutional tug-of-war between the German government and the country’s Constitutional Court (see here, here and here for background). The latest chapter concerns a series of legal challenges against the ESM and fiscal treaty, on the basis that they violate the sovereign budgetary rights of the German Parliament.

The stakes are very high given that the Court could, in theory, strike down the best part of Merkel and Schäuble’s efforts over the past year. It is unlikely that the Court will do so given the ramifications, but at Tuesday’s public hearing, the judges (pictured in their traditional red robes) indicated that they would take their time before issuing a ruling; up to three months to decide on whether to issue a temporary injunction pending a full decision on constitutional compatibility early next year.

This delay is most unwelcome news for Merkel who is desperate to reassure financial markets and other political leaders that Germany is serious about the eurozone rescue, which is why she expended a lot of political capital in pushing the two treaties as a package measure through the German parliament in record quick time, and was angry that after all that German President Joachim Gauck refused to give his assent after the Court asked him to allow them time to consider their legality.

The problem is that the Court was specifically designed – by the British and the Americans no less - to counteract the concentration of power and rash decision making by other federal institutions, a sort of systemic circuit breaker. It is for this reason it is tucked away in sleepy Karlsruhe, the opposite end of the country to Berlin and previously Bonn.

The question of urgency vs caution has led to deep divisions not only within the German government but also the wider political and constitutional establishment. Ahead of the proceedings, Justice Minister Sabine Leutheusser-Schnarrenberger (FDP) said that:

“Government and politicians should stay out of this completely. The Constitutional Court does not need any advice... Judges are also aware of the importance that their decision will have on the economy.”

However, addressing the Court directly, Finance Minister Wolfgang Schäuble warned that:

“A considerable postponement of the ESM… could cause considerable further uncertainty on markets beyond Germany and a substantial loss of trust in the eurozone's ability to make necessary decisions in an appropriate timeframe”.

Meanwhile the Guardian reports that Chancellor Angela Merkel allegedly told a private meeting of her CDU party that the Court was “pushing the limits” of her patience, while Martin Schulz, the President of the European Parliament complained that some of the Court’s verdicts are "characterized by great ignorance”. Conversely, Bundesbank President Jens Wiedmann, also giving evidence, warned that “a quick ratification is no guarantee that the crisis will not escalate further".

The graphic below shows how Germany’s major political figures have found themselves at odds over the Court ruling, with figures from all parties adopting a range of positions on the issue:

The German media on the other hand have presented a broadly united front, with Die Welt noting that the Court’s eventual ruling will determine “How far European integration can go without damaging the democratic substance of Germany”. A leader in German tabloid Bild argues that “It is totally right that the constitutional judges take more time – after all, the question is whether Germany is overburdening itself financially. That would be a lot worse than short term turbulences on the financial markets”, while in centre-left broadsheet Süddeutsche Zeitung, Heribert Prantl argues that:

“Karlsruhe has to find the ways and means by which Europe can continue to be built without breaking the foundations of the constitutional settlement. The success of this search is existentially vital for Germany and the EU. It is more important than the fleeting applause of the so-called markets in return for a quick decision.”

While the Court, even in the opinion of some of the litigants, is not expected to torpedo the eurozone rescue at this stage (although they take a slightly more pessimistic view over on FT Alphaville), the red lines of the existing constitutional settlement are looming ahead, with most forms of debt pooling that many have called for - such as Eurobonds or a banking union - lying on the opposite side. As the debate over the future of the eurozone will continue to rumble on, expect further tension in the broadly consensual model of German politics between further European integration on one hand and preserving the current constitutional settlement on the other.

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."

-          German Chancellor Angela Merkel, 7 June 2012

“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.”

-          German Finance Minister Wolfgang Schäuble, 17 May 2012

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.

"Yes to Europe means no to debt pooling"

As so often in the crisis, German tabloid Bild has captured a hugely complex debate - on the possible pooling of present and future liabilities among eurozone members - with a snappy illustration, depicting Merkel's 'rock solid' resistance to the idea after she said that "there will be no shared total debt liability for as long as I live".

Merkel's stance is warmly endorsed by former Handelsblatt editor Gabor Steingart who in a front page op-ed, under the headline “Nein! No! Non!", compares Merkel to a lioness and argues that her firm denouncement of debt pooling was the "best moment" of her Chancellorship, adding that “this is the Merkel that one wishes to see more often”. He adds that:

“Now she has to explain to our friends at the summit that that it helps no one if Germany passes the fruits of its labour around liberally. It is actually the other way around: ‘Yes’ to Europe means ‘No’ to Barroso's ideas. The replacement of the main components of the market economy – work and effort – with consumption and credit has led us to where we are today… Europe needs to roll up its sleeves and not a parasitic philosophy, where everyone aspires to the wealth of their neighbours.”

That's pretty strong.
 
However, for its part Bild does also cheekily notes other 'famous last words', such as DDR leader Erich Honecker's assertion that the Berlin Wall would stand for 100 years or former Libyan leader Muammar Gaddafi's claim that his people loved him.

But still, a good illustration of how far away Germany still is from nodding through grand schemes for debt pooling. 

Is the EU really like 27 garden gnomes?

We've been making a concerted effort here on the OE blog to bring you many of the more memorable quotes from the eurozone crisis, and we've had at least one more following a debate in the German Bundestag ahead of tomorrow's European Council summit.

As expected there was a lot of anxiety about potential debt pooling. From CSU MP Gerda Hasselfeldt, for example, who said that calls for a pooling of liabilities between eurozone members would be:

"a betrayal of German interests... It would not be right for the deposits of German savers to be put at risk from the misconduct of banks in other countries” 

Meanwhile, speaking to journalists before the debate, FDP leader Rainer Brüderle slammed the present state of the EU, claiming that:

"The whole world is laughing its head off over these 27, soon to be 28, garden gnomes that are trying to play global politics but can't even get their own act together."

Brüderle, renowned for his tendency to shoot from the hip, had to row back when asked if he counted Angela Merkel among these gnomes, saying that the comment had not been directed at any one individual.

Combined with Merkel's comments yesterday that there would be no shared total debt liability for as "long as she is alive", the mood in Germany is certainly feisty ahead of tomorrow's summit...

Merkel comes out swinging against debt pooling

Debt pooling in practice? (h/t Phil's Stock World)

In recent weeks Chancellor Merkel has come under ever-increasing pressure to “do what is necessary” and take the plunge on debt pooling within the eurozone. This pressure has been applied from a wide of actors including the other big eurozone countries (France, Italy and Spain), the EU institutions (Commission President Barroso, Council President van Rompuy, Eurogroup chief Juncker and ECB head Draghi), the IMF and last but not least UK Prime Minister David Cameron and US President Barack Obama.

However, Merkel - who in her time has crossed a fair few ‘red lines’ - has come out swinging ahead of Thursday’s summit of EU leaders, with Handelsblatt reporting that she is has lashed out at discussions ahead of the for focusing "far too much on all kinds of common liability [including] eurobonds, eurobills and a European common deposit guarantee fund with common liability". She described the proposals as "economically false and counterproductive" and asked Van Rompuy, to rework the report he published ahead of the summit to shift the focus from debt pooling to budget discipline.

According to Reuters, at a meeting today with representatives from the FDP, her junior coalition partner, she went even further, claiming that: 

“Europe will not have shared total debt liability as long as I live” 

If accurate, this is strong stuff and - though intended for a very domestic audience - certainly a departure from the measured and stoic tone Merkel usually adopts. Likewise Merkel’s reaction to suggestions that Germans would be getting a referendum on a new constitution allowing for greater EU integration in the immediate future – after Finance Minister Schäuble had suggested this in an interview with Der Spiegel –suggest that she does not anticipate full debt pooling as an immediate possibility, with FT Deutschland citing her spokesman as saying “clearly we are not there yet.”

However, to split some pretty big hairs, the qualification of “shared total liability” hints that Merkel is not ruling out all forms of eurobonds during her lifetime, such as debt redemption fund as favoured by the SPD and Green opposition. Likewise she could offer other concessions, something hinted at by the news that Germany could be prepared to drop the provision that ESM loans are senior to other debt, something which has been perceived to have contributed to rising Spanish debt yields on the assumption private creditors would take the biggest hit.

However, nothing will happen on any form of debt pooling before the German elections in the autumn 2013.