Chapter 12
Chronicles
Jean-Claude Trichet, who led the ECB during the crisis until Mario Draghi took over on November 1, 2011, recalls going to New York in early 1998 and telling Wall Street investors about the impending introduction of the euro on January 1 the following year. They told him he was talking nonsense. “Too bold, too strange, never done – absolutely impossible,” he said. “And I knew myself of course that it was totally prepared and it will be done. You had a strategic political commitment, not to speak of the technicalities of it, that was there. I told them that for the most important marketplace in the world it’s better to be in tune with reality.” He sees the crisis from the U.S. subprime calamity through to the sovereign debt turmoil as one continuous thread throughout which the euro never dipped below $1.17, thus remaining above its entry value. He chuckled at the thought of the number of hedge funds that “lost their culottes, as we say in French” in betting against the euro. “The euro, as a currency, has demonstrated a remarkable stability in the crisis. And the euro area has proved a capacity to correct its own weaknesses: don’t bet on the belief that the euro area will change in its nature with countries leaving it,” he said. “The euro is there, it will be there, there is no doubt.”1
Merkel defeated the doomsayers in 2012, when betting against the 17-nation currency turned out to be the wrong call. While it was Draghi, the Goldman Sachs alumnus, who fought contagion with the threat of unlimited ECB bond buying, investors consistently underestimated or failed to understand the political will in Europe to keep the euro together. John Paulson, the Wall Street investor who manages $19 billion in hedge funds, said the euro would fall apart because it was “structurally flawed” and wagered against European sovereign bonds. Citigroup Inc. economists led by Willem Buiter in London said in July there was a 90 percent chance that Greece would leave the euro. They assumed an exit by January 1, 2013. Instead, Greek bonds surged the most worldwide and the country stayed in the euro as no one, Merkel included, wanted to take the risk of severing its financial lifeline. She remains on record as wanting to see as many countries as possible adopt the euro.
Her battle for elected politicians’ supremacy over financial markets was waning as the debt crisis entered a relative lull in late 2012, yet she wasn’t about to declare a truce. Having preached worldwide financial regulation, she also agreed to start EU talks on setting up a Europe-wide banking supervisor, a step along the way to a so-called banking union that signals deeper integration and will open the door to the region’s permanent rescue fund – with Germany as the biggest capital provider – to aid blighted banks.
When she took office in November 2005, Merkel gave a speech to the Bundestag setting out her policy on Europe, saying she would fight for German interests while pushing for alliances and cooperation. “I know that our partners have great expectations of us,” she said. “The expectations are so great because Europe finds itself in the midst of a deep crisis. At its root, I believe this crisis is about a lack of mutual trust.” Having made the decision to defend the euro, she has turned the grand European project into a test of whether the currency union’s other countries have faith in Germany to follow her rules to save it. While arguing like a dispassionate scientist, her aim is to show that core European values such as democracy and human rights are better guides for globalization than systems of countries such as China.
Merkel began her 2013 diplomacy by receiving Antonis Samaras, the Greek prime minister who finally delivered on austerity commitments, at the Chancellery in Berlin for a demonstration of common purpose, saying Germany has to work to secure economic growth and jobs no less than Greece does. She spelled out her election-year agenda a few days before, mixing homespun truths about the power of hard work and the need to beat global economic rivals. Wearing a festive silver jacket and with the Reichstag as her backdrop, she used her New Year’s address from the Chancellery to deliver a blunt message to the nation: that 2013 will be harder economically than the previous year. Germans must focus on their core strengths of research and innovation to create jobs and stay ahead, she said. “When we can do what others can’t, then we retain and create wealth,” she said. As her goals for 2013 she listed addressing the challenges of Germany’s energy transformation, demographic change, and bringing the state’s finances under control. As much of Europe embarks on a course of structural overhaul, “the reforms that we’ve introduced will require a whole lot of patience to work. The crisis is not over by a long way,” she said. In particular, much still needs to be done at international level to better oversee the financial markets. “The world has still not fully learned the lessons of the devastating financial crisis of 2008. Never again can such irresponsibility as happened then be allowed to repeat itself. In the social-market economy, the state is the guardian of order. People must be able to have faith in that.”2
It was a seven-minute manifesto that encapsulated Merkel’s almost religious ethos of work, perseverance, and ultimate redemption. In terms of content, most of it could just as easily come from her Social Democratic Party opponents. Going into 2013, a year that would determine whether she exceeded her SPD predecessor Gerhard Schröder’s two terms and won a third, Merkel appeared at her most presidential. She began the year with support for her Christian Democratic bloc edging above 41 percent in polls, the highest of her chancellorship.3 She extended her lead as Germany’s most popular politician in a monthly poll for ZDF television, with her crisis lieutenant, Finance Minister Wolfgang Schäuble, in second spot. Voters were happier with her government than at any time during her second term and said their personal economic situation was rosier than at any time since the question was first asked by pollster Forschungsgruppe Wahlen in January 2004. Eight weeks previously, in early November, she warned the times of crisis would continue and put a date on its duration: at least five more years, and even then only if accompanied by “a bit of strictness” in attacking Europe’s problems. That would conveniently take her to the end of a third term – which according to one senior party insider is as long as she intends to serve.
Even if the sovereign debt crisis were starting to ease, a number of long-term challenges stood between Merkel and her goal of serving out a third term. Her decision to shut off Germany’s nuclear capacity means the government must seek to more than triple the share of renewables in the energy mix by 2050. Targets were already being missed in 2012 as plans to develop some 25,000 megawatts of offshore wind power by 2030 were delayed amid technical and financing difficulties.4 The government attempted to elevate the “energy overhaul” to a matter of national importance above mere electioneering. Merkel, speaking in December 2012 at the inauguration of a 380-kilovolt smart grid in Schwerin, state capital of Mecklenburg-Western Pomerania in Germany’s northeast, stressed the experimental nature of the technology and financing needed to bring offshore wind power from the north coast to the industrial centers in the south. “This is absolute virgin territory for all investors,” she said. “When you look at the number of projects that still have to be realized, then you know that a lot of work lies ahead.”5 Rather than the risks associated with developing grand projects, the danger for the government lies in the price consumers will be asked to pay for power, already among the highest in Europe. The government has announced plans to curb subsidies for solar, biomass and wind power, but that couldn’t stop the four grid companies from raising the surcharge consumers pay for funding renewable energy for 2013 to a record.
Merkel’s constant warnings about the threat to Germany’s economic standing, notably from China, are backed by an OECD forecasting model for growth and prosperity. The OECD estimates that China will overtake the euro area by one measure of GDP around the end of 2013 and the U.S. a few years later, becoming the world’s biggest economy. India is projected to surpass the euro area around 2032, while rising productivity and relatively young populations will also drive gains by countries such as Indonesia and Brazil. While China and the euro region each accounted for 17 percent of world GDP in 2011, China’s share will jump to 27.9 percent in 2030 as the euro area’s shrinks to 11.7 percent. That’s a steeper decline than projected for the U.S., whose share will fall from 22.7 percent to 17.8 percent, according to the OECD’s extrapolations. China’s contribution to GDP will be little changed in 2060, while the euro area’s share will decline further to 8.8 percent, again more quickly than the U.S.6 Germany’s economy is projected to expand at an average of 1 percent per year through 2060, the lowest rate among the 42 countries in the study, which sees the fastest growth in India, Indonesia, China, Saudi Arabia, South Africa, and Mexico. Even so, emerging countries will close only part of the gap in living standards with advanced nations. The paper also provides fodder for Merkel’s concern about the rest of the euro area. Productivity is projected to increase more quickly in Germany than in the U.K., France and Italy. Using the U.S. standard of living as the baseline, while aging populations and low birth rates hold back growth in much of Western Europe in the decades ahead, Germany will maintain its living standard relative to the U.S., according to the study. Countries such as France, Spain, Italy, Austria and Ireland are projected to fall behind, while eastern EU members – most of them currently outside the euro – will increasingly close the gap.
Back in 1980, Günter Grass wrote a fictionalized account of a reading tour he made of China entitled Headbirths: Or, the Germans are Dying Out. Germany’s perennially low birth rate, among the lowest in the world, saw about 200,000 fewer births than deaths in 2012, according to official projections. However, the population rose by about the same number to 82 million as a result of immigration, the second year in a row of a population increase after eight years of decline. While other European countries in the crosswires of the crisis suffer recession and record unemployment, in relatively unscathed Germany immigration was set to outstrip outward migration by 340,000, the most since at least 1995.7
European officials from Commission President José Barroso to Luxembourg’s Jean-Claude Juncker started 2013 by sounding the all-clear as a measure of investor confidence returned to the euro area. While austerity fatigue and European countries’ willingness to transfer sovereignty as a condition of closer integration remain potential stumbling blocks, the difference this time was that the ECB had turned into the euro area’s backstop when governments couldn’t agree on what to do. Draghi’s unprecedented pledge to defend the currency signaled an expansion of the ECB’s powers, which will only increase when it takes on Europe-wide tasks of banking supervision. The central bank’s move became necessary after the euro area’s 17 governments squabbled and haggled for more than two years over every measure to stem the debt crisis. Investors – the financial markets that Merkel said she was battling for control over the euro area’s destiny – were increasingly betting on the currency union’s breakup. That sovereign-bond spreads reflected this speculation was a crucial reason Draghi cited in making his conditional offer of unlimited ECB bond buying. A log of U.S. Treasury Secretary Timothy Geithner’s calls and meetings in the debt crisis showed that his main European contacts were Draghi and his predecessor Trichet. Next most frequent was Germany’s Schäuble, followed by the French finance ministry.8 The compilation by Bruegel, the Brussels-based think tank, based on Geithner’s publicly available schedule, underscores the Obama administration’s concern throughout the debt crisis. The Frankfurt-based ECB also is a place where Germany doesn’t have a veto. When Bundesbank chief Jens Weidmann dissented on the ECB’s bond-buying vote, Merkel faced a quandary. She solved it by voicing support for Weidmann as well as Draghi. It’s an indication that the euro area and the ECB, whose anti-inflation mandate was modeled on the Bundesbank, may be up for grabs between a German-led northern tier and the southern euro-area countries that look to France as an ally. The Banque de France was created in 1800 by Napoleon Bonaparte to spur economic growth after a recession during the period of the French Revolution. Its task was “to issue bank notes payable to the bearer on sight in exchange for discounted commercial bills.” The French national bank, headquartered a block from the old Royal Palace Gardens in Paris’s stately First Arrondissement, changed its statute to become independent of the state only in 1993.9 The Bundesbank, housed in a 1960s concrete high-rise near a sports complex and an autobahn ramp in Frankfurt, was founded in 1957 with the express aim of keeping West Germany’s deutsche mark stable after the nation’s disastrous experience with hyperinflation during the 1920s. Until the ECB took over monetary policy from national central banks in the euro area and afterwards as part of the euro system, the Bundesbank says it “fulfilled this mandate for half a century with greater determination and success than almost any other monetary institution in the world.”
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The righteous pride on the other side of the Rhine has always grated on French policy makers, who view the ECB’s natural role as more activist, closer to the Federal Reserve’s. Letting the ECB help level the economic and fiscal differences within the euro area rather than relying primarily on the German recipe of austerity to boost the competitiveness of the weaker countries fits with the French view of the ECB as “a real federal institution” for the euro area, as Musca puts it. At that point, joint euro-area debt issuance becomes less urgent. That view, and Merkel’s ambiguity, don’t jibe with the Bundesbank’s self-image as the protector of German savers from inflation. Weidmann, who was Merkel’s economic adviser in the Chancellery until she chose him as Bundesbank head, sees the central bank on the cusp of a slippery slope toward breaching its mandate by financing national debts and deficits. By covering for euro-area governments, the ECB in his view risks becoming the tool of elected politicians too weak or unwilling to administer painful economic therapy in their countries. If the ECB rolls over once, it will roll over again. Weidmann, whose post gives him a seat on the ECB policy-making Governing Council, says the central bank didn’t need to make its bond-buying offer. “Then policy makers would have had to act,” he told the Frankfurter Allgemeine Sonntagszeitung, which elevated to him “resistance” leader in the purported battle for the ECB’s direction. “I certainly know that these decisions are difficult for policy makers. But it’s the task of policy makers, not the central bank, to decide about a redistribution of solvency risks in Europe.”10
True to the deal between her and Sarkozy in late 2011, Merkel hasn’t stood in the ECB’s way. As the ECB’s policy shifts and the Federal Reserve’s “quantitative easing” alleviated the immediate crisis, her poll ratings and those of her party climbed at the end of 2012. She may face pressure to take a stand if Europe’s debt crisis returns. When the ECB, then led by Trichet, agreed in 2009 to buy 60 billion euros of covered bonds to counter recession in the euro area, Merkel spoke up to warn that the ECB’s independence was at stake. She views the economic-stimulus powers of the Federal Reserve and Bank of England “with great skepticism,” Merkel told an audience in Berlin that included Draghi, then head of the Bank of Italy and the Financial Stability Board, and former Bundesbank chief Hans Tietmeyer. “The European Central Bank has also bowed to international pressure a bit with its covered-bond purchases. We all have to return to an independent central-bank policy and a policy of common sense.”11
Merkel may face even starker choices once again if efforts by vulnerable euro countries to curb borrowing and overhaul their economies falter. Boerner, the family-business lobbyist who backs Draghi’s crisis response, says the risk of a north–south breakup in the euro area isn’t banished yet because voters may simply reject austerity. “It’s within the realm of imagination, if the southern Europeans don’t carry out reforms,” he says. “Do these societies have the ability to reform themselves, to become modern societies, within the democratic process?” If they don’t, it’s “inevitable” that a northern core euro area will split off. It would have to be a managed breakup, including orderly defaults for countries that have had enough of sacrifices in the name of European unity. “And I do believe you could manage it. Mrs. Merkel surely is capable enough to do it,” Boerner says. “That said, we’re not pushing for it. I also don’t think it’s going to happen.”
A glimpse of how a northern euro might look was on show in Merkel’s Stralsund constituency in May 2012, when Germany chaired the 11-nation Baltic Sea Council. With representatives from the Nordic countries to the Baltic states, Poland, Russia and the European Commission, it is a forum in which Germany, and Merkel, feels completely at ease. Merkel hosted her fellow leaders at “Zur Fähre,” a pub dating back to 1332 whose name evokes the nearby ferry dock. She toasted her guests with white wine as they sat by candlelight around a varnished wooden table, a ship’s wheel decorating the wall behind her. To her right sat the EU’s José Barroso while on her left was Norwegian Prime Minister Jens Stoltenberg, wielding a schooner of beer.12 Most of the countries represented share a philosophy of economic stability that mirrors the German view, whereas the 17-member eurozone is made up predominantly of countries that do not think like Germany. If the Baltic Council countries were Europe, then Europe would not have a problem, she might say. The trouble is that the Baltic Sea Council has no unified view on Europe. Indeed, of the best performers, Norway isn’t even in the EU, the Swedes are EU members but shy away from the euro, while Poland, committed to join the single currency, isn’t there yet. Until that time, Merkel is happy for every Baltic state that joins the euro since they bring a way of thinking that is in tune with German sensibilities.
Merkel has come a long way since she told the Bundestag in March 2010 that countries might have to be kicked out of the eurozone if they didn’t hold to the rules. Yet for all her subsequent talk of political union in Europe, the topic didn’t merit a mention in her goals for 2013. Furthering integration may even now be at an impasse, with fellow European countries having swallowed as much as they can stomach of Merkel’s medicine and Merkel herself unwilling to risk upsetting German voters before the fall election. Her call for a European competitiveness pact to follow on from the fiscal compact and steps made toward a banking union ran into resistance days after she put it at the core of her address to the 2013 World Economic Forum in Davos, as Swedish Prime Minister Fredrik Reinfeldt said he opposed shifting more powers to Brussels.13
All the same, the German chancellor has a track record of getting her way and proving outside observers wrong. Constanze Stelzenmüller, head of the Berlin office of the German Marshall Fund, writing in the Financial Times in 2005 the day after Merkel’s party and Schröder’s SPD wrapped up three weeks of negotiations to form a government, noted that the only historic precedent for a grand coalition lasted just three years, from 1966 to 1969. The new coalition, with Merkel as chancellor and Steinbrück her finance minister, was an “interregnum arrangement” and would last two years, if that. As Stelzenmüller also noted, however, Merkel “is a canny, cool-headed operator who has built a political career on being underestimated.”14
Key for now is that Merkel remains in tune with voters, having dragged them along with her through the years of crisis. Many small steps is her axiom, and it concurs with the German electorate: in times of crisis, Merkel rids Germans of their inner angst. “Germans are a very nervous people, bowing to hysteria, very quickly becoming afraid,” said Boerner. “Merkel alleviates that.”
After seven years in power, she’s cobbled together a view of the financial crisis that’s unlikely to change if she stays in charge. She fended off waves of calls from her fellow European leaders to agree to pool the euro area’s debt, including a proposal by her own council of economic advisers. Anyone who wanted to pacify markets with an easy way out “has no clue about the economy,” the physicist-turned-crisis-manager said.15 By mid-2012, the new Socialist government in Paris gave up on joint euro-area bonds, acknowledging they were a line Merkel wouldn’t cross. Amid polls that consistently show German voters refuse to agree to underwrite the debts of their fellow Europeans, the SPD has quietly backed away from its prior support for euro bonds. Her statement that euro bonds wouldn’t happen in her lifetime, reportedly made behind closed doors to lawmakers in Berlin, was named Quote of the Year by the Frankfurter Allgemeine Zeitung, Germany’s newspaper of record.16
Samaras complained about the “cacophony” of opinion in Germany about how to deal with Greece, including within Merkel’s coalition. The record shows that Merkel’s voice is the one that counts. She won every parliamentary vote related to the debt crisis, though not without dissent. She saw off an anti-Europe groundswell among the Free Democrats, her second-term coalition ally. She has headed the CDU since 2000, outlasting several male rivals for top posts. She has held sway in two governing coalitions of different constellations, and would doubtless succeed in dominating a third. More than three years after the debt crisis began, her policies have changed the face of Europe and underscored her endurance. She is one of the last pre-crisis government leaders still standing – her euro-area peers in France, Italy, Spain, Greece, Ireland, Portugal, Slovakia, and Slovenia all fell. Cyprus, which sought a bailout in mid-2012, voted for a change of president in February 2013, electing a candidate whom Merkel backed. Italy’s legislative elections the same month didn’t go Merkel’s way, after a comeback by Berlusconi and a surge in support for the anti-austerity movement of Beppe Grillo produced a stalemate.
Investors, economists and other political leaders criticize her as cautious and slow off the mark, qualities she showed in abundance before Greece’s first bailout, the first big decision point in the debt crisis. Merkel doesn’t see that as a drawback and polls suggest voters trust her because of it. Going slow and imposing tough conditions on aid also helps her balance Germans’ desire to be seen as good Europeans with voters’ anger at bailouts for weaker euro-area countries. This is a country that loves stability: the iconic VW Golf, Volkswagen’s best-selling car, has been on the market since 1974 always under the same name. Even policy makers in other countries exasperated with her approach express understanding for legislative and constitutional hurdles she has to navigate in Germany and admiration for her effort to keep Germans from turning against the euro. Economic growth in the middle of the debt crisis is a feel-good factor that benefits Merkel, while her modest lifestyle doesn’t make waves. In Merkel’s battle with the markets, she may not have imposed the primacy of politics, but the two sides have fought to a standstill. Her agenda for Europe is utilitarian. It is conservative in the sense of preserving Europe’s strengths – Germany’s economy, and the welfare states that prevent the kind of social conflict that led to war in the 20th century. “Europe may be at a fateful crossroads,” she said at a German–Portuguese business forum in Lisbon in November 2012. “The next few years will decide whether or not we can keep up with the rising emerging countries and the best industrial countries in the world. I believe we have to tell people in our countries again and again: If we don’t do it ourselves, nobody on the outside will step in to help us maintain or increase our prosperity.”17 That’s a message Merkel has made her own, as she exhorts Europeans to raise their collective performance to compete in a globalized world. For all her many detractors, Merkel has ensured it is one Europe is no longer able to sit back and ignore.
Notes
1. Trichet comments in e-mail to authors, January 2013.
2. Merkel’s New Year’s message, video: http://www.bundeskanzlerin.de/Content/DE/Artikel/2011/12/2011–12–31-neujahresansprache.html.
3. Poll trends: http://www.wahlrecht.de/umfragen/forsa.htm.
4. Stefan Nicola and Brian Parkin, “Merkel’s Offshore Windpower Dream for Germany Stalls,” Bloomberg News, January 17, 2013: http://www.bloomberg.com/news/2013–01–16/merkel-s-offshore-wind-power-dream-for-germany-stalls.html.
5. Merkel speech to open power grid line, December 18, 2012: http://www.bundeskanzlerin.de/Content/DE/Rede/2012/12/2012–12–18-merkel-nordleitung.html.
6. “Looking to 2060: A Global Vision of Long-Term Growth,” OECD Economics Department Policy Notes, No. 15, November 2012.
7. German Federal Statistic Office release, January 15, 2013: https://www.destatis.de/DE/PresseService/Presse/Pressemitteilungen/2013/01/PD13_013_12411.html;jsessionid=F3B1626AD08E9FD33316878ED60C4B8A.cae1.
8. Jean Pisani-Ferry, “Tim Geithner and Europe’s Phone Number,” Bruegel, November 4, 2012: http://www.bruegel.org/nc/blog/detail/article/934-tim-geithner-and-europes-phone-number.
9. Banque de France history: http://www.banque-france.fr/en/banque-de-france/history/the-milestones/1800-creation-of-the-banque-de-france.html.
10. Article on Bundesbank website: http://www.bundesbank.de/Redaktion/DE/Interviews/2012_12_30_weidmann_fas.html.
11. Official Merkel transcript: http://archiv.bundesregierung.de/Content/DE/Rede/2009/06/2009–06–02-merkel-insm.html?nn=273438.
12. “Prost! In dieser Hafenkneipe tagt Kanzlerin Merkel,” Bild, May 31, 2012.
13. Handelsblatt interview, January 27, 2013: http://www.handelsblatt.com/politik/international/fredrik-reinfeldt-schwedens-premierminister-stellt-sich-gegen-merkel/7694610.html.
14. Constanze Stelzenmüller “Merkel’s Coalition Will be Lucky to Survive Two Years,” FT opinion, October 10, 2005: http://www.ft.com/intl/cms/s/2/fd7112da-39b6–11da-806e-00000e2511c8.html#axzz2I8ycUekQ.
15. Tony Czuczka, “Merkel Says Those Demanding Endgame to Europe’s Debt Crisis Have ‘No Clue’,” Bloomberg News, October 4, 2011: http://www.bloomberg.com/news/2011–10–04/merkel-says-she-remains-opposed-to-joint-euro-area-bonds.html.
16. http://www.faz.net/aktuell/gesellschaft/menschen/zitate-des-jahres-2012-solange-ich-lebe-12012004.html.
17. Official transcript of Merkel comments: http://www.bundesregierung.de/Content/DE/Rede/2012/11/2012–11–12-merkel-lissabon.html.