Ahead of the G20 summit in Seoul this week, the mood music between member countries is markedly different from previous conferences. Where the meetings in Washington, London, Pittsburgh, and Toronto were also used as platforms for diplomatic niceties and emphatic declarations of joint responsibility, the political differences between the main players are far more visible this time. To a great degree, this is the achievement of Wolfgang Schäuble, the German finance minister.
In a series of interviews and statements, Schäuble has openly criticised the United States over its trade policy proposals and the Fed’s new round of ‘quantitative easing’. He has also confronted his European colleagues with his hard stance on further bailouts within the eurozone.
Schäuble’s bluntness may be unusual on the international stage, especially as it comes from one of Germany’s most experienced politicians. This makes it all the more hazardous, not least for the future of the euro.
Public servants working for the federal government in Berlin have long known that their finance minister takes no prisoners. He is famously as tough with himself as he is with others.
In 1990, Schäuble narrowly survived an assassination attempt by a deranged man. Ever since, he has been confined to the wheelchair, but only a few months later went back to his job as interior minister in the Kohl government. After seven years in opposition, Schäuble returned to the cabinet table when Angela Merkel became chancellor in 2005. Though his fragile health increasingly requires long periods in hospital, he continues his work with remarkable self-discipline.
The very same sacrifice and precision he expects of himself, Schäuble demands of others, too. His press secretary painfully had to find out at a media conference last week. For failing to distribute an information folder to waiting journalists, Schäuble ridiculed and scolded him in front of the cameras before angrily leaving the scene. The video of this cynical outburst became an instant hit on YouTube with more than 550,000 views so far. In the end, it was not Schäuble who resigned over the affair but his press secretary.
Schäuble’s G20 colleagues are well advised to watch this video if they want to understand the psyche of their German counterpart. They are dealing with someone who by normal political standards is unusually sharp and forceful – or, his critics would say, belligerent and brutal.
At the age of 68, Schäuble is nearing the end of his political career, 38 years of which he spent as a member of parliament and 14 years as a senior cabinet minister. Some people mellow with age. With Schäuble, it is the other way around.
For a long time, post-War German diplomacy was characterised by careful quietness. Strong assertions of the country’s national interests were taboo, which was only too understandable for historical reasons. It is with this tradition that self-assured Schäuble is breaking. Far more than any of his predecessors, he is not only formulating Germany’s interests but also openly pushing for them against friend and foe.
After US Treasury Secretary Timothy Geithner had written one of his notorious letters to his G20 colleagues last month calling for big export nations to reduce their trade surpluses, Schäuble retaliated. On the day the Fed announced a further relaxation of its lax monetary policy, he openly criticised this policy.
He did not mince his words. The US economy was looking “bad”; the results of various stimulus measures were “dismal”; and pumping in more money would not solve America’s problems, Schäuble lectured on German TV. “We shall be talking about these matters bilaterally, but of course we will also critically discuss these issues with our American friends at the G20 summit in Korea,” he said. Later, he renewed his critique of US economic policy, adding that the US “lived too long on tick, excessively inflated its financial sector and neglected its medium-sized industrial business.”
The message was clear: Germany would not follow American demands of curbing its exports. In fact, it does not even accept the US view that other countries’ trade balances were to blame for America’s domestic problems. A G20 confrontation between surplus countries like China, Japan and Germany on the one hand and deficit countries led by the US and Britain on the other would thus be inevitable.
A few days later, Schäuble also started a new argument with his European colleagues. After the EU summit had just tasked EU president Herman van Rompuy with drafting a reformulation of the EU’s Stability and Growth Pact (The EU’s win-win losers, November 4), the German finance minister made it clear which outcome he expected.
In a long interview with news magazine Der Spiegel, he pointed out that the European Union “had not been founded for the sake of enriching financial investors”. For him, this meant that in future fiscal crises in eurozone countries private bondholders would have to share the cost of financial rescues. This would protect taxpayers, not least in Germany where European bailouts have become extremely unpopular.
Such remarks are, of course, carefully registered in the markets where spreads between Irish bonds and German bunds rose to a historic high after the interview. Although Schäuble told the Spiegel that he only envisaged haircuts for new investors, this would still make refinancing severely difficult for euro periphery countries like Greece, Ireland and Portugal. In effect, it might well condemn them to a sovereign default and a forced exit from the monetary union.
The new tough line coming out of the German treasury has the backing of Chancellor Merkel. Though her own personal relationship with the minister has often been difficult in the past, she knows that Schäuble is one of the very few indispensable heavyweights in her cabinet.
In their open confrontation with the Americans and other European countries, the Germans have good arguments on their side. Trade restrictions are certainly not the way out of the world economy’s problems; and to prevent moral hazard, bondholders need to bear the costs of defaults.
In this sense, Schäuble is not only right but deserves support. Whether his less than diplomatic way will earn it is more than questionable, though. Beyond this, the minister’s loose tongue could trigger events that not even a sharp mind like him would be able to control.