by David Marsh
When Josef Joffe, then foreign editor of the German daily Süddeutsche Zeitung, wrote a 4,000-word article at end-1997 attacking the planned formation of the European single currency, his essay was published first, in English, in the New York Review of Books. “Never in the history of democracy have so few debated so little about so momentous a transformation in the lives of men and women,” fulminated Mr Joffe. “And so the train [the euro] will probably leave the station on time, on January 1 1999, but with screeching wheels and shaky couplings. If it goes off the rails, as economics and politics suggest it will, the consequences may contaminate much of what Europe has achieved during the past forty years.”
The piece appeared in an abridged German translation in the Süddeutsche Zeitung more than a month later, unobtrusively buried in a weekend supplement.
The episode epitomises past barriers to plain speaking about economic and monetary union (Emu) - testimony to Germanic political correctness that now is ebbing fast. Virulent reaction to the previous lack of debate and information helps explain the sudden rise of anti-euro opposition across Europe’s largest economy. Many ordinary Germans always feared the euro would be less stable than the D-Mark. Yet, r eflecting post-war belief that German interests ineluctably overlapped with Europe’s, there was little public discussion on Emu’s risks. This went beyond Germany. One senior Dutch central banker, now retired, says most European governments – including his own – agreed the Maastricht treaty on Emu 20 years ago without understanding what they had signed into law.
In April 1998 Germany’s two houses of parliament voted through the euro with only minimal opposition. Now, the German-in-the-street is making up for lost time. Popular antagonism against public funding for struggling euro members makes Chancellor Angela Merkel highly cautious on emergency aid for Greece.
There is an air of déja-vu. Wilhelm Hankel, Wilhelm Nölling, Karl-Albrecht Schachtschneider and Joachim Starbatty, four German professors who launched an anti-euro lawsuit at the constitutional court in 1998, are preparing fresh legal action. Then, Wolfgang Schäuble, in 1998 Chancellor Kohl’s main political lieutenant, dismissed the plaintiffs’ chances. Now, there is a much greater likelihood of success for the professors’ claims of infringements to the Emu rules, in particular over the “no-bail-out clause” preventing joint payment of weaker states’ debts.
Mr Schäuble, meanwhile, is German finance minister. When Mr Kohl accomplished German unification in 1990, he repeated Chancellor Otto von Bismarck’s phrase when Germany was first unified in 1871 that the coattails of history were brushing his side. Two decades later, in defining their reticence over Greek debt, Ms Merkel and Mr Schäuble feel the restrictive hand of the constitutional court at their shoulders.
As Greece approaches a possible debt restructuring and even a euro exit, questions are due why warning signals went ignored that weaker Emu countries were building up unsustainable borrowings. In technical reports, the European Commission in the last two years – well before recent Greek budget deficit controversy - voiced worries about rapidly rising short-term external debt in Greece and Portugal caused by repeated large current account deficits resulting from sharply falling competitiveness. Yet the Commission’s widely publicised, largely laudatory report on the euro’s first decade, in May 2008, devoted only three paragraphs in 328 pages to current account imbalances. The document said in most countries “the ongoing adjustment” was “benign”.
Jean-Claude Trichet, European Central Bank president has been caught off guard by a German backlash against Greece. When criticism of Greek accounting irregularities previously erupted in 2004-05, Mr Trichet stated “we must learn from past experience” to prevent reoccurrence. After latest news of Athens budgetary cover-ups, the ECB’s image has been dented by admission that such efforts have failed.
Inadequate discussion of Emu’s problems has been particularly acute over whether political union is needed to accompany monetary union. Both the Bundesbank and Mr Kohl suggested in 1991 that without political union, Emu would eventually fail. In intervening years leading German figures softened their view. In 2006 Otmar Issing, the former Bundesbank chief economist who took this role at the ECB, said monetary union “can work and survive… without fully-fledged political union.” Now Mr Issing says: “In the 1990s many economists – I was among them – warned that starting monetary union without having established a political union was putting the cart before the horse.”
Leading German figures never explained that large deficits in countries like Greece would eventually impinge on Germany’s own finances. Germany, the main surplus country, has inevitably become the largest creditor of the euro zone’s heavily indebted peripheral nations. As Mr Issing said in 1999, the “no-bail-out” clause was meant to prevent the “negative external effects of national misbehaviour” from spilling over elsewhere. In fact, German tax payers will have to pay for Greece – directly, through emergency government loans, or indirectly, through supporting German banks that will be hit by a Greek debt restructuring, or, conceivably, both. This is one of many costly facts about Emu now bursting disagreeably to the surface.
