Germany
had held the key to an orderly resolution of the EU’s sovereign debt
crisis in its early stage.
Yet Chancellor Angela Merkel’s government faced hostile
questioning in the Bundestag, the German parliament, and even a legal
challenge
in the constitutional court, before it managed to finally sign off on
the rescue
package by Friday, April 30, 2010. Bundestag members were incensed over
the
government’s
lack of transparency in negotiating the deal, and the rumored size of
German
commitment in the rescue package.
Defending her earlier posture in refusing to allow a timely
bail-out plan for Greece
without International Monetary Fund (IMF) involvement, Merkel said it
would
have been “unthinkable” that Athens
would live up to such tough conditions three months ago without IMF
discipline.
She said that involvement of the IMF, the subject of strong
disagreement within
the German government, was necessary to give the program “maximum
credibility”
around the world, notwithstanding that IMF credibility in previous
financial
crises had fallen to junk staus.
The 16 Eurozone countries and the IMF on May 2, 2010 agreed
to release €110 billion in “unprecedented” rescue loans to Greece, €1.3
billion
of which will come even from cash-strapped little Ireland.
Irish Minister for Finance Brian Lenihan, who did not attend
the meeting, said that Ireland
stood ready to play its part, adding that the Government was preparing
legislation to release bilateral loans to Greece.
“Today’s decision will help safeguard the stability of the euro area as
a whole
and this stability will benefit all euro zone member states,” the
Minister said
of the €110 billion package.
Having agreed a fortnight earlier on April 25 to provide up
to €45 billion to Greece
in the first year of the rescue, the European and IMF authorities
responded to extreme
market pressure on Friday May 2 to set out for the first time the
overall value
of €110 billion ($146 billion) for the emergency package.
The deal to activate the rescue, struck at an extraordinary
meeting of Eurozone finance ministers, came as Greece
agreed to intensify efforts in the next three years to bring its budget
deficit
under control. Taxes will rise, public sector pay will be cut and
pension age
will also be increased under the plan.
The pact follows months of market pressure on Greek
borrowing costs and mounting fear of financial market contagion
bringing
fiscally weak countries such as Spain,
Portugal
and Ireland
under pressure on their sovereign debts. Merkel’s Failed
Leadership
While German Chancellor Angela Merkel had played for time
during key talks in the previous 10 days, she changed stance on April 28, 2010 to call for a
swift
agreement, after market fell sharply in response to a rating downgrade
of Greece
sovereign debt on April 27.Although
most Germans were also opposed to the rescue and Merkel was facing a
difficult
regional election on Sunday,
May 9, 2010, she characterized the rescue plan she now
supported as an
effort to secure monetary stability in the Eurozone. Berlin
introduced legislation Friday,
May 7, 2010 to facilitate German participation in the €110
billion ($146 billion)
rescue package.
As it turned out, Merkel failed in her two prong objective.
The market viewed the Sunday, May 2, €110 billion ($146 billion) rescue
package
as grossly inadequate and share prices fell sharply on the following
Monday,
May 3 and continued throughout the week.
Politically, Merkel also suffered a major setback in an
important regional election. In the state election on Sunday, May 9,
2010 in
Germany’s most populous state, North Rhine-Westphalia (NRW), a region
of some
18 million people that includes Cologne and the industrial Ruhr area,
voters
dealt Chancellor Angela Merkel’ Christian Democrats a painful setback,
erasing
her government's majority in the upper house of parliament and curbing
its
power after a stumbling start and criticism over the Greek debt crisis.
Merkel’s
center-right alliance was voted out of power in a state election. It
was the
first electoral test since Merkel began her second term in October 2009.
Merkel’s Christian Democrats Union (CDU) party plunged to
its worst election result since World War II in Germany's
most populous state, losing control of parliament's upper house in Berlin,
as voters punished her reversal on aid for Greece.
The result in a regional election in NRW may cost Merkel’s CDU its hold
on
power in the large state, and deprive CDU of its majority in the upper
chamber,
the Bundesrat, undermining the prospect of legislative approval of tax
cuts and
extension of the lifespan of nuclear-power plants.
Officials in Merkel’s CDU blamed the party’s poor showing in
the election on the large German loans for Greece (€22.4 billion valued
at
$28.8 billion) passed by parliament on May 7 in the face of broad
public
opposition. Merkel was widely criticized at home and abroad for first
refusing
to support aid to Greece,
taking the position that the crisis in Greece
was a local problem, and then pressing German lawmakers to back Germany’s
contribution to a €110 billion lifeline as the fear of contagion
outpaced other
concerns.
Almut Moeller, head of European policy at the German Council
on Foreign Relations in Berlin said in a press interview that Merkel
has become
vulnerable politically, adding: “After her record of dithering over
help for
Greece, she really needs to make a show now of strong, resolute policy
in
Brussels to help stem the crisis from spreading further. The last thing
the
Eurozone needs at this point is weak German leadership.”
Yet, the election defeat weakened Merkel’s ability to exert
strong leadership both at home and abroad. Foreign Minister Guido
Westerwelle,
the vice chancellor and leader of the Free Democrats, Merkel’s junior
coalition
partner, said after the election: “This is of course a warning shot for
the
governing parties, and the people should know that it has been heard.
We must
make an effort to win back lost trust.”
Merkel’s conservative CDU won 34.5% of the vote — more than
10 points fewer than five years ago — and the Free Democrats 6.8%. The
coalition, whose makeup mirrors that of the national government,
finished well
short of a majority in the state legislature.
The main opposition Social Democrats finished with 34.5% and
the Greens 12.1%. A hard-left rival, the Left Party, won 5.6%. A
coalition of
the three minority parties is not a particularly likely prospect except
under
conditions of strong public discontent in the event of further economic
deterioration of the EU.
It was not immediately clear who would run North
Rhine-Westphalia and whether conservative Juergen Ruettgers could cling
onto
the governor’s office in Duesseldorf. The Social Democrats hoped to run
the state
with the Greens, but it wasn’t clear whether they had won enough seats
to gain
control.
Merkel’s conservative Christian Democrats will have less
political space to run Germany
- the EU’s biggest economy - without a majority in the upper house,
which
represents Germany’s
16 states and must approve major legislation. To govern, Merkel will
have to compromise
with the opposition policy positions and accept diminishing ability to
push
through tax cuts as a means of stimulating the economy and to carry out
significant
reform to the health-insurance system, the implementation of both being
part of
the core positions of the Free Democrats whose support Merkel needs.
Merkel's federal government currently controls 37 of the 69
upper-house votes, including six from North Rhine-Westphalia. Its stock
has
slid following a poor start, constant squabbling over key policies and
the
challenge from the Greek crisis and its effect on the euro. A senior
Merkel
aide said after the election that the setback had many causes — among
them local
problems and “too much unnecessary arguing on the public stage.” German
democracy has reduced the strength of German leadership at a time when
such
strength is imperative. The Christian Democrats’ general secretary,
Hermann
Groehe, also pointed to “the general uncertainty, people’s concerns
with a view
to the stability of the euro, the situation in Greece.”
Merkel initially held out on agreeing to aid for the nearly
insolvent and liquidity-starved Greece,
prompting German opposition parties to accuse her of avoiding an
unpopular
decision in the election run-up. Two days before the Sunday, May 9
election, at
the desperate urging of Merkel, parliament approved on Friday, May 7,
two days
after the violent demonstration in Athens, a bill allowing Germany to
grant as
much as €22.4 billion ($28.6 billion) in credit over three years as
part of a
wider rescue plan to Greece. Greece Only a Headline Issue
While Greece
was the headline issue, a more fundamental problem with German voters
was the
Merkel government’s stumbling start in dealing with problems at home.
Freed
last year from a “grand coalition” with the opposition Social Democrats
in
which she shone as a consensus-builder, Merkel then got bogged down in
internal
divisions — notably about the controversial proposal of big tax cuts in
a
recession that will add to the government’s fiscal deficit.In response to the spreading and deepening
Eurozone sovereign debt crisis and a resounding election defeat for the
ruling
coalition in North Rhine-Westphalia, the Merkel government has since
removed
tax cuts indefinitely from its agenda. The last thing Germany
needs now is to increase her public debt.
Without an upper-house majority, Merkel may be forced to
again focus on consensus-building, a regular fixture in post WWII
German politics.
Merkel’s first term had been consumed with consensus-building.
Opposition
parties are against tax cuts and other controversial plans such as
extending self
life of nuclear power stations. Social Democratic opposition leader
Sigmar
Gabriel told the press that the election setback was “a good signal ...
that
North-Rhine Westphalia has declared by popular vote that this isn’t how
we want
to live in Germany.”
Gabriel said it was a “turning point” for the Social Democrats, who are
still
recovering from a heavy national election defeat in September 2009.
They led
North Rhine-Westphalia for nearly four decades until losing it in 2005
amid
discontent over then-Chancellor Gerhard Schroeder’s efforts to trim the
welfare
state.
Merkel lost her important state election not because of
voter anger over the Greek bailout. Mr Ruettgers, the CDU prime
minister of
North Rhine-Westphalia, was trailing in the polls long before the Greek
crisis
broke, primarily because of a party financing scandal. Also, Merkel’s
coalition
partner, the FDP, has dramatically lost in popularity for insisting on
unpopular tax-cuts that will threaten Germany’s
long welfare state tradition and balanced budgets.
The outcome of a dramatic weekend for German Chancellor
Angela Merkel is a near disaster for Europe’s
most
powerful leader. She missed a great opportunity for assuming the
leadership
needed to steer the EU out of its most difficult crisis.
Haunted by the potential adverse impact of Greece’s near insolvency
on the EU leaders put together a €750 billion (nearly $1 trillion)
rescue
package in long nightly negotiations on Sunday May 9 that lasted in to
the
morning hours of Monday, May 10, to try to stabilize the teetering
economies of
the euro-using nations heavily burdened by debt - but the driving force
behind
that package was French President Nicolas Sarkozy, not German
Chancellor Angela
Merkel.
Merkel’s CDU, fresh from a heavy defeat in North
Rhine-Westphalia's regional elections, was a wounded participant in the
meeting
of EU leaders as election results came in while the final decision was
approaching. The NRW Bundesland (state government), Germany’s
economic powerhouse, was no longer in the hands of the same
conservative and
liberal coalition that had ruled the federal government in Berlin.
This change will make governing a lot more difficult for Merkel and her
liberal
partners because they have lost the majority in Germany’s
secondary political chamber, the Bundesrat. Germany
was no longer represented in the crucial EU meeting by a leader who
enjoys the
undivided support of her people.
The linkage between the Greek crisis and turmoil in German
domestic politics is indirect but significant. The failure of German
leadership
in the EU was publicly demonstrated as events unfolded.
Three months earlier, it already was clear that Greece
was unable to handle its exploding budget deficit without help. The
other Eurozone
member states discussed for more than a month what was needed to be
done to
help Greece
and,
by March 25, put forth a mix bag of financial aid with the
International
Monetary Fund agreeing to step in as the emergency relief team. At that
point,
Merkel squandered the chance to take the stage to be the strong
political
leader of the hour. She failed to tell the German people that helping Greece
financially before the situation got out of control would prevent deep
losses
to all within Eurozone, particularly Germany. Germany
had a €4.8 billion ($6.1 billion) trade surplus with Greece
in 2009. Greece
is Germany’s
second biggest customer in military export. German private banks have
acquired
Greek government loans worth €30 billion to €40 billion ($38.3 billion
to $51
billion). Thus a collapsing Greek market would hit Germany’s
economy hard even without the inevitable effect of contagion to other
Eurozone
member states to which Germany
also enjoyed trade surpluses.Most
significantly, Merkel failed to tell German voters that the Greek
sovereign
debt crisis is a critical test for the euro’s future. International
market confidence
on the commitment of the 16 euro-zone countries to defend the stability
of
their common currency will be shaken by a failure to bail out Greece’s
euro debts.
Instead of strong and timely leadership, Merkel acted like a
opportunistic politician and tried to buy time by downplaying the
gravity of
the crisis and the probability and importance of the need for Germany
to help bail out Greece
for Germany’s
own sake. She allowed popular dislike among the conservative majority
of German
voters on the idea of aiding a socialist EU member nation that has been
squandering
borrowed money since joining the EMU, and had openly betrayed EU
institutions
with false budget accounts, notwithstanding that many other Eurozone
member
states were also guilty of the same sins.
Merkel wanted to delay her decision on Greece
until after the CDU fanned off challenges in May 9 regional elections.
She
tried to play for time instead of acting as a decisive political leader
of a critically
needed and well-orchestrated pan-European defense of the euro. Merkel’s reluctance to take up the role of
decisive leadership damaged the euro, her coalition government in Germany
and, ultimately, herself as an effective leader in world affairs. The Issue of a
Transfer Union
Chancellor Angela Merkel’s closest advisers are adamant that
they took the lead in drafting the rescue plan and that no lasting
defeat has
been suffered. Yet since the finance ministers of the Eurozone signed
off on
their €750 billion stabilization package in the early hours on Monday,
May 10,
members of the German government and senior officials have been
fighting a
desperate rearguard action to deny they have allowed the European Union
to
become a “transfer union”, a term to mean the EU could become little
more than
a transfer mechanism to switch money from rich taxpayers in Germany to
poorer
ones in southern and eastern Europe. The term has become part of the
political
lexicon in the debate over massive credit guarantees for members of the
Eurozone.
“We will not allow any transfer union,” asserted Ulrich
Wilhelm, state secretary and chief spokesman for Chancellor Merkel, in
his
official account of the massive Brussels
deal. “We achieved that goal,” pointing out that the €440 billion in
credit
guarantees would not come from any EU fund, but from national
governments. The Rise of France’s
Economic Government
“France
has won” was the common reaction in Europe on
the day
the deal to save the Eurozone was done. Recapturing the leadership role
for Europe
from Germany
has been the goal of France
since the end of the Cold War.
Behind the loaded German domestic political debate sits a
deep suspicion that France Germany’s closest ally and greatest rival in
the EU,
has finally achieved its goal of creating of an “economic government”
which subordinates
the independence of the European Central Bank to political imperatives.
Instead, the German emphasis is all about “stability” of the
euro, and with it, the German economic structure. Merkel insists that
she is
only prepared to lend German money, whether to Greece
or any other needy Eurozone member state, to preserve the stability of
the
common currency. “I have made it clear that for us in the federal
government,
the most important thing is the stability of the currency,” she said on
Monday
night. “I am very proud of our German culture of stability.”
This fixation on the German culture of stability is behind Germany’s
insistence on all Eurozone member-states to commit themselves to tough
austerity programs, and to promise to accelerate action to regulate
market
speculators. The Issue of
Regulatory Reform – A LongRange Policy Split between US-UK-EU
On the question of regulations, Merkel and Luxembourg Prime
Minister Jean-Claude Juncker called for urgent regulation of
credit-default
swaps (CDS) to shore up financial stability in the euro area and
prevent a
rerun of the Greek financial crisis which still threatens to spring up
like
wild flower after a spring rain all over Eurozone.
Merkel, speaking to reporters in Luxembourg
on March 9, moments before Greek Prime Minister Papandreou met
President Obama
in Washington, said the
EU must
take the lead in curbing the “very speculative elements” of derivatives
trading, going beyond previous Group of 20 agreements. “We’re of the
opinion
that a quick implementation of actions in the area of CDS has to
happen,”
Merkel said. Citing “ongoing speculation against euro-region
countries,” she
called for the “fastest possible” implementation of new rules. Europe must “do everything to
avoid
unhealthy speculation,” said Luxembourg Prime Minister Juncker, who
heads the
euro-area finance ministers group. European leaders are ratcheting up
the
pressure for tighter global regulation of derivatives as they seek to
learn the
lessons of the Greek fiscal crisis. Papandreou was expected to press
Obama to
help combat the “unprincipled speculators” that threaten a new global
financial
crisis. “Europe and America
must say ‘enough is enough’ to those speculators who only place value
on
immediate returns, with utter disregard for the consequences on the
larger
economic system,” Papandreou said in a speech in Washington.
German Chancellor Merkel and French President Sarkozy are
turning to regulatory efforts to help tame the surge in Greek financing
costs. Greece’s
budget gap, at 12.7% of Greek GDP, the EMU’s biggest and more than four
times
EMU limits. Papandreou’s government last week outlined measures to save
€4.8
billion ($6.5 billion), including higher fuel, tobacco and sales taxes,
as it
seeks to lop 4 percentage points off the budget deficit.
EU Economic and Monetary Affairs Commissioner Olli Rehn said
in an interview in Strasbourg, France,
that Greece
is
“on track” to achieve its deficit-cutting goals following the passage
of extra
austerity measures. The new measures put Greece
“onto the path of fiscal adjustment for 2012 below 3%” of GDP, he said.
The
difference in yield, or spread, between the 10-year Greek bond and its
German
equivalent, the bund, rose 1 basis point to 307 basis points as of 12:42 p.m. on March 9 in London.
A European Monetary
Fund
As Papandreou pushes ahead with deficit-cutting plans that
set off deadly and massive protests in Greece,
European leaders may be headed for a split over a proposal to set up a
lender
of last resort to bolster fiscally distressed euro-area countries.
Merkel,
whose finance minister Wolfgang Schaeuble champions the idea of a
European
Monetary Fund (EMF), said it would work as “a measure of last resort”
and only
after “a cascade of sanctions” against governments that break euro
rules. A
change of European treaties would be required, Merkel said.
French Finance Minister Christine Lagarde said an EMF may
not be the best option: “Other ideas need to be studied and those that
respect
the Lisbon treaty are much
preferable.”Luxembourg’s
Juncker said any such fund should not create an opening “for countries
that
don’t take budgetary discipline so seriously.”
Bundesbank President Axel Weber , a European Central Bank
governing-council member, also questioned the fund proposal. He also
said he
sees the need for more transparency in the CDS market. “The CDS market
has
developed very strongly and drives prices in bond markets,” Weber told
reporters in Frankfurt. “Not everybody who buys
protection has an underlying exposure. It’s a very intransparent
market, we
need to have a much more transparency.”
While European leaders seek ways to limit CDS, Germany’s
BaFin financial regulator said market data lack evidence that the
instruments
were used to speculate against Greek bonds. Data provided by the US
Depository
Trust & Clearing Corporation did not show that new open positions
were
built up and also does not indicate “massive speculative action,” BaFin
said in
a statement.
Yet the German government is fighting an uphill battle
against commentators and opposition politicians, even from the ranks of
its own
coalition, to persuade the public that the “special purpose vehicle”
that will
provide credit guarantees to Eurozone members is not a “transfer union”
by
another name.
Bild Zeitung, the mass-circulation newspaper that has been
fighting a daily battle against the Greek bail-out, and now the wider
€750
billion Eurozone stability plan, taunted the chancellor again on
Tuesday, May
11: “The ‘safety parachute’ for the euro is the ultimate crime for
Europe,” it
declared. “We Germans have made sacrifices for a stable euro for the
last 10
years, with wage restraint and sacrificing pension rises. We have paid
the
price while others have been partying at our expense . . . Europe’s
path to a transfer union is simply a road to its ruin.”
The German taxpayers’ federation said on Tuesday, May 11,
its members had been taken unawares by the government, which claimed
there was
no alternative to the package. “These decisions will cost us very
dear,” said Reiner
Holznagel, federation secretary.
As for Greece,
there have been no further riots since Wednesday, May 5, 2010 when the public was
shocked by three deaths that
resulted from the fire bombing of a bank. Both in Greece and Germany, a
slight
majority was emerging in favor of the European bailout, while still 66%
of
Germans are favorably disposed towards the Euro, the fate for which is
closely
tied to the fate of sovereign debt of Eurozone member states.
Just as the Obama neoliberal centrist Democrats are facing
electoral defeat by conservative right-of-center Republicans in the
mid-term
election because of theirs inept handling of the financial crisis,
Merkel’s
Conservative Christian Democrats experienced electoral defeat by a new
coalition of left of center parties. US Involvement
Obama consulted the leaders of Germany
and France
on
Sunday, May 9, on jittery European financial markets and the need for
European
leaders to take steps to build confidence in the markets. Obama spoke
first by
phone with German Chancellor Merkel and later with French President
Sarkozy.
It was his second conversation in three days with Merkel.
White House spokesman Bill Burton said the phone conversation with
Merkel was
part of Obama’s “ongoing engagement with European leaders with regard
to the
economic situation there. … They discussed the importance of the
members of the
European Union taking resolute steps to build confidence in the
markets.”
After the talks with Sarkozy, the White House issued a
nearly identical statement describing the conversation, different only
in
saying that Obama and Sarkozy had “agreed” on the need for European
steps to
build confidence in the markets.
At one point during a call with Group of Seven officials at the weekend
of
May 7, Tim Geithner, US Treasury secretary, made it clear that the US
was not pleased with the Eurozone rescue package as it stood.
A person with knowledge of the discussions told the press that Geithner
was
“very direct”, telling his counterparts the intervention was not in the
“right
order of magnitude” and should be increased, and more commitments were
needed
from struggling countries in terms of “fiscal credibility”.Geithner himself has been criticized for the
inadequate size of the US
stimulus package.
Mr Geithner’s forcefulness highlights how US
officials have stepped up their involvement in efforts to contain the
European
sovereign debt crisis in recent days, amid escalating fears within the
Obama
administration and the Federal Reserve that the US
recovery might be under threat. An apprehension that was justified
by the
sharp declines in US equity markets since the Greek crisis began. Even
the
trillion dollar stabilization package brought only two days of respite
in a
secular bear market that began in mid April, 2010. Concerns for
financial
stability in Europe had been at the top of Washington’s
economic agenda for weeks, but a sharp drop in markets at the end of
April put
policymakers in crisis mode.Obama
intervened with calls to Merkel and Sarkozy on Sunday. Also, Mr
Geithner
discussed the eurozone rescue with the Group of 20 leading economies. Fed-ECB Currency Swap
Renewed
The Fed also began working with the European Central Bank
and other central banks on ways to reinstate currency swap lines that
were
introduced during the financial crisis to help foreign banks gain
access to
dollar funding. The swap lines, which totaled nearly $600bn at the
height of
the meltdown, were wound down by the start of 2010.
The Federal open market committee, which sets US interest
rates, held an emergency session on Sunday, May 9, to approve the swaps
– a
move supported by the Obama administration amid hopes it would provide
another
tool to ease the strain in the credit markets.
The decision to reinstate the currency swap facilities was
seen within the Fed as a relatively risk-free way of helping out Europe:
its counterparties in the swaps are foreign central banks,
not the financial
institutions that primarily benefit from the deals, and there is no
foreign
exchange risk because the price of the swap is agreed at the outset. Continuing Doubts on
Recovery
Continuing doubts about the sustainability of the fragile
recovery in the US
and the potential for credit strains in Europe
to cross
the Atlantic meant US
officials felt compelled to get more involved.
The European debt crisis has unfolded amid questionable
growing optimism on the strength of the US
recovery. Incurable optimists are pointing to the economy posting a
3.2%
annualized growth rate in the first quarter of 2010 and four
consecutive months
of job creation as sign of a v-shape recovery.
Yet fundamental data show serious structural problems remain
while reform activism has been ground to a halt. Structurally, the
credit
system remains hopelessly impaired, with stimulus money going to
perpetuate the
very same malpractices that have brought on the systemic crisis. Fiscal
and
public debt difficulties are demolishing many of the most productive
states.
Consumer spending cannot revive without a significant pick up in
employment
which is nowhere in sight. Most of the bailout money given to
distressed banks
has gone into carry trade for synthetic speculative profit from
interest rate
arbitrage in cyber finance, totally detached form the real economy
where the
creation of jobs and products counts. The entire financial sector,
including
all the too-big-to-fail banks, seems to be under indictment for
criminal fraud
that would take years to move through the courts, with decades of
associated
civil litigation that will leave lingering uncertainty in the market.
The rise
of the dollar against the euro and the yen will also torpedo hope of
revival
for the US
export sector. The Federal Government is in danger of being turned into
a
partisan gridlock after the mid-term election next November, with the
possibility of a premature lame-duck presidency two years ahead normal.
May 17, 2010 Next: The Trillion
Dollar Failure
