Is Germany doing enough to save the euro?

Angela Merkel (picture European Commission)

Debate at King’s College London, on 12 December 2011, on the subject of “Germany has not taken enough proactive steps to solve the eurozone crisis, despite being at the top table of European politics and its economic standing.”  Richard Laming was asked to speak against the motion.

The debate about what should be done to save the euro and fix the current crisis is an important one, and looking at the responsibility of Germany in solving the crisis is an interesting way of looking at it.  I want to explain why I think it is wrong for the other European countries to base their plans simply on Germany doing more.

To understand German policy up to now, it makes sense to think about the crisis in two ways: as a long-term problem, and as a short-term one.

The long-term problem is that countries in Europe have unsustainable models of public financing.  They are spending more on health, welfare, education and other public services than they raise in tax revenue, and they are covering the difference by borrowing.  At the time of the Maastricht treaty, 20 years ago, the aim was to set a public debt limit of 60 per cent of GDP.  Now, in the eurozone, the average debt is 85 per cent of GDP.  There has been a remorseless increase in most European countries during that time.  This increase cannot go on, as governments will eventually be unable to borrow further in the markets.

The short-term problem is that some governments, such as Greece, have already reached that market borrowing limit.  They are now dependent on lending from other governments to keep their public services afloat, to keep their schools and hospitals open.  Germany, along with other European countries, is playing its part in making those loans.

One of the reasons why Germany is itself a creditor and not a borrower of these emergency loans is that Germany has undergone some far-reaching reforms over the past ten years.  There was an agreement between the social partners to restrain wage increases in order to boost competitiveness, for example.  As a result, compensation (on an EU-defined standard measure) grew by only 1.5 per cent each year, compared with 4.5 per cent in the UK and 6 per cent in Greece.

So, while Germany is helping provide emergency loans, it is not willing to make a bigger contribution to addressing the short-term problems, for example by allowing the ECB to make unlimited loans to Greece, as long as other countries are not dealing with their own long-term problems.

That is why the terms of the agreement reached by the European Council last week are founded on the same budgetary principles that Germany has itself adopted.  They include a constitutional limit on public sector borrowing, with surveillance and sanctions to ensure that these limits are followed.  The commitments to sustainable public finances need to be institutional and not merely political if they are to be credible.  That is why the new treaty is needed.

Not only does the German government want treaty provisions on spending restraint, it also wanted to embed those provisions in the institutions of the European Union.  It should be the European Commission, for example, elected by and accountable to the European Parliament, that should have the role of enforcing those spending roles.  There have even been proposals that the president of the Commission should be directly elected by the citizens, rather than elected by the European Parliament, as currently provided for in the Lisbon treaty.

Those are not the proposals of a country acting selfishly.  Countries and citizens have political rights within the European Union regardless of their wealth: a Greek citizen can vote just as surely as a German.  If the intergovernmental method gains the upper hand over the Community method in dealing with these institutional issues, then that might well strengthen the interests of the richer, creditor countries over the rest.  (This is one of the reasons for regretting the British refusal to allow the Lisbon treaty to be amended and insistence on a completely new treaty for the 26: the new treaty is likely to be more intergovernmental in nature than the existing EU treaties.)

The European Council aims to get the new treaty, containing these institutional elements of the long-term solution, agreed by March 2012.  The treaty would still need to be ratified by all the member states and the long-term economic philosophy it represents would need to be adopted by them all, too, but this is the outline of a plan to save the euro.  It is German-inspired, certainly, but does not give a disproportionate influence to German politicians in its future structure.

There remains the criticism, of course, that all this has taken too long, and that an urgent funding crisis might overwhelm one or more eurozone member states in the meantime.  If that happens, will Germany and the other member states allow that bankrupt country to collapse out of the euro, or will they continue to lend whatever money is necessary?  For reasons of maintaining the pressure for the long-term reforms, Chancellor Merkel has been ambiguous about this (with adverse consequences in Ireland, for example), but I suspect that the ECB would lend whatever money was necessary, with the approval, explicit or otherwise, of the rest of the EU.

In conclusion, while it is certainly true that Germany could do more and have done more to solve the crisis in the eurozone, I do not think it is correct to think that Germany in particular should do more.  The problems are shared and the solution must be shared.  If only the British could realise that too.

Richard Laming is chair of Federal Union.  The opinions expressed are those of the author and not necessarily those of Federal Union.

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