Published in Business Spectator (Melbourne), 2 May 2013
In September last year, I wrote about the German constitutional court’s preliminary ruling on the legality of the European Stability Mechanism (Has Germany’s court set the stage for an exit?, 20 September 2012). Most commentators at the time believed the court had simply okayed the ESM. They also thought that the court had brushed aside doubts about Germany’s ongoing commitment to the EU’s various bailout policies
I wasn’t so sure. Back then, I pointed out that, in fact, the court had made its concerns about the nature of the euro rescue policies quite clear. The judges had signalled their willingness to seriously examine the European Central Bank measures such as bond purchases from struggling euro member states.
Last week, Germany’s business daily Handelsblatt revealed that the court now got what it asked for. A 29-page leaked dossier prepared for the court, by the Bundesbank (Germany’s central bank), explains why the ECB’s measures are not suitable to end the crisis; why they could cost Germany dearly; and why the court should intervene.
It was not the only sign that patience with the euro has worn thin even at the highest levels of Germany. A few days before the Bundesbank leak, the head of the German Finance Ministry’s Academic Advisory Council, Kai Konrad, gave an interview to Sunday newspaper Welt am Sonntag. In it, he deviated markedly from the government’s line that the euro had to be defended at all costs.
Professor Konrad’s assessment was blunt: “Europe is important to me. The euro is not. I don’t think it has a high chance of survival beyond the medium term.” When asked to specify what he meant by that, he said that realistically he would give it another five years.
Taken together, these occurrences paint an interesting picture. Germany’s highest court, its central bank and the government’s top economic advisers now openly doubt the euro in its current form. This is astonishing since the German government’s official position is that the current euro arrangements are safe, forever, and beyond debate.
So what’s going on?
For a start, public opinion is changing. Whereas in 2007, according to a new Eurobarometer survey, 36 per cent of all Germans had no trust in the EU and its institutions, today it is 59 per cent. There is growing unease in Germany about the way the euro crisis has developed. The Cyprus bailout package and the Italian election fiasco have no doubt aggravated such fears.
Opinion polls reinforce the view that policies meant to save the euro are not working. The latest fiscal data is showing that the eurozone isn’t getting its debt problem under control (Fire and ice on Europe’s debt march, 25 April 2013). At the same time, unemployment is spiralling upwards around the Mediterranean. In France, unemployment now stands at 11.5 per cent. This is undoubtedly high but not nearly as catastrophic as neighbouring Spain, where 27.2 per cent (and 57.2 of all under-25 year-olds) are without a job.
In these circumstances, it is not difficult to be sceptical about the future of the euro. Add the appearance of a new anti-euro party (Alternative für Deutschland) to the mix, and one can imagine what must be going through Chancellor Angela Merkel’s head.
Merkel has always made the case for the euro domestically, while at the EU level she was pushing for economic reforms and budget consolidation. It appears she is now failing on both fronts. Both within and outside Germany the euro is losing popularity. At the same time, the systematic weaknesses of a common currency for Europe can no longer be denied.
Despite all her previous utterings that the survival of the euro was a matter of war and peace and that there was no alternative, Angela Merkel would be a strange politician if she did not have an another plan for when public opinion changes or things go wrong.
There are many events which would require a reassessment of Germany’s euro stance: The need for another Greek, Cypriot or Spanish bailout for which there is no German parliamentary majority, let alone public appetite; hardening resistance in the euro periphery to austerity demands; new bailout requirements set by the constitutional court; or simply the growing popularity of anti-euro forces in German politics.
Angela Merkel may soon come to a point where circumstances do not allow her to continue her euro policies. By her nature, Merkel certainly is no revolutionary. But driven by events, and realising the futility of defending the status quo, she will eventually need to make a momentous decision. This could be to allow one or several euro members to depart from monetary union. It could even be to pull Germany itself out of the eurozone.
That an open discussion in Germany about the future of the euro has now begun is a taste of things to come. A failure of the euro is no longer a taboo subject in the highest echelons of society. It shows where the debate is moving.
There is no doubt that Merkel will use all her political cunning to prevent any decision on the future of the euro until after the German elections in September. But post-election, all bets are off.
The Bundesbank and the German constitutional court are confronting and challenging the ECB, and such a conflict cannot just be moderated away. Eventually, the Germans will need to come clear on where they want to take the eurozone.
Or whether they really just want to get out of it.
