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23/03/2015 | Germany’s France Problem

Stephan Richter

As Berlin sees it, Europe’s real struggle is not over Greece—it’s about sending a tough message to its No. 1 partner.


As the Eurozone stumbles through another crisis, most of the media’s attention is on Angela Merkel, the leader of the continent’s greatest power, Germany. But the figure we should really be asking questions about is the man at her side, Wolfgang Schaeuble, who is the German finance minister and is widely considered the arch-champion of austerity. Is Schaeuble a flame-thrower hell-bent on upbraiding not just Greece, but much of Europe, if not the entire world economy? Do the policies he advocates perhaps reflect personal bitterness, as some people somberly surmise? And just how much does Greece matter at this stage in the battle for Europe’s future?

Not really that much. And that’s what the new Greek government—which is playing chicken with Germany, daring it to kick Athens out of the eurozone—needs to be told. What Mr. Game Theory, aka Greece’s new Finance Minister Yanis Varoufakis, has never understood properly is that the battle is not about Greece—or Europe’s South, for that matter. 

It’s about France, stupid!

Berlin is extremely nervous about the ability of its biggest partner in what must still be considered a grand experiment in continental unity, France, to re-dynamize its economy. So far, Paris has only taken baby steps toward more liberalization, such as slightly increasing the number of Sundays when stores can be open. And Schaeuble fears any policy that will encourage the French to slacken even more—such as forgiving the debts or statist policies of other Eurozone countries.

Yes, Greece is small and could be supported—but not at the price of having the French then losing the little reform momentum they have mustered so far. And that is a very real danger.

From an American perspective, it is vitally important to understand what this battle is all about. It is not about German intransigence. The effort that Germany leads (and on which it itself undoubtedly has to make more progress) is about making sure Europe’s economies finally manage to become less dependent on the state sector.

If Europe fails in that battle against statism, then that is truly bad news for the global economy.

Blaming German stubbornness on a perverted love of austerity or, alternatively, on German “nationalism”—a meme that is often heard in the media—is absurd. Germany’s Social Democrats, largely following in the footsteps of their Northern European brethren, decided in 2003 to allow for far more flexibility in their labor markets than they had grown accustomed to. More people were allowed to lose their jobs, in defiance of traditional European socialism. That was an expression of economic realism against the backdrop of rising competition in the global economy—not an outgrowth of nationalism.

And now, the Germans expect the rest of Europe to follow suit, starting with France. Despite the restraints that are usually applied among political partners, Schaeuble himself has spoken quite directly in interviews about the need for the managers of France’s economy to restore confidence among investors, reduce costs, become more flexible at long last and live up to the promises made, budgetary or otherwise. 

But he has been concerned for some time about France’s inclination, exhibited for the past several years, to play for time. In his view, plainly put, it’s simply time to man up. Otherwise, confidence will not return, neither among investors nor consumers.

While French President François Hollande has finally seen the light in terms of embracing the need for economic reform, that moment came only two years into his term. Worse, Hollande ran an election campaign in 2012 that, put into the French political context, was almost as rosy-eyed as the left-wing Syriza’s recent campaign promises in Greece. Hollande promised to take back the timid reforms that his predecessor, Nicolas Sarkozy, had implemented.

France matters so much because the way it turns will determine whether the Eurozone in anywhere near its present form will have a future. If Messrs. Hollande, Valls and Macron—the French president, prime minister and economic minister, respectively—do not succeed, then all bets are off.

With the European Central Bank already being in the business of financing government budget deficits, Europe has the worst kind of de facto fiscal union: transfer payments being made through the back door and without any real conditions being applied.

The key battle then is not at all about “morality tales,” “austerity” or the like. It is about having the courage of one’s convictions to reform the national economy of the second-biggest partner in the euro experiment. Absent that, all the budgetary maneuvers just amount to the famous shuffling of the chairs on the deck of the Titanic.

The Germans are no economic dreamers. They ultimately know that they will not see the Greek debt repaid. And they are doubtful about the ability of several other nations as well.

For Schaeuble, who articulates the views of many Germans, without structural reforms the growth path of France’s and the other troubled nations’ economies will never get sufficiently revitalized. No Eurobonds or European Investment Bank investment schemes can make up for that. They would be a mere flash in the pan.

The ultimate solution may well be a partial collateralization of outstanding debts, say, over the 60 percent or 90 percent of GDP.  There is no doubt that many Eurozone countries are quite heavily indebted after the 2008 global financial crisis. Shaving off some of this debt—by issuing a long-term (say, 50-year) bond that would allow to put their excess debt into a pan-European bond issue—may help revitalize European economies. These debts could be paid back over the long haul, freeing up resources for strategic public investments to underpin a European economic growth strategy.

For German policymakers, the question is: What guarantees are there to make such a plan work? Their very real worry is that, even if such a painful step were to be implemented, the game will just be beginning from scratch: Nations will not live up to their commitments, even on the basis of a “clean” balance sheet and an agreed upon macroeconomic framework.

That, at least, is the lesson from previous episodes when, after the turn of the millennium, the concrete benefits resulting from strong moves toward European integration, such as a lowering of interest rates after the launch of the euro, were effectively wasted in Greece and elsewhere. The resulting monetary benefits that were intended to “lubricate” the domestic transformation were just (ab)used to preserve the status quo.

From France to Italy to Portugal and Greece, structural issues—from overregulation to reliance on the job-creating abilities of a bloated state sector—were simply not addressed. That, however, is the precondition for investor confidence to return, from both domestic and foreign sources, and to tackle youth unemployment for real. 

These countries’ constant push for more “European” investment funds being made from public sources is very revealing. If the long overdue structural reforms had been tackled by now, investor confidence would have returned on its own. Absent those reforms, no amount of public funds can make up for national peculiarities and rigidities that undermine any sensible investment proposal or calculation.

Schaeuble has seen all that from up close. And despite it all, he is a firm believer of offering help, provided that the nations in question are making a serious effort to mend their ways. In fact, in Germany, his reputation is that of one of the most pro-European Union politicians in the country and that of a man generally fond of France (he grew up close to the Franco-German border).

However, the German finance minister is also an economic and political realist. While he can’t say so out loud, he know that at the core the struggle in Europe is about this: Does Europe consist of one economic culture that, while quite apart for the time being, ultimately moves toward each other?  That was the perhaps heroic and definitely optimistic assumption when the Eurozone was launched. Or is that assumption by now unrealistic?

What the Germans—and the many nations, mostly in Europe’s north that think along similar lines—are concerned about is that there are two distinct economic cultures.  One is more consolidation-oriented, with functioning and effective public administrations.  Popular will in those countries, even if begrudgingly, is prepared to make the necessary adjustments to be successful in the global economy. 

The other set of countries does not have the same features and is almost constantly in crisis mode, whether they are inside the Eurozone or not.  Their elites have basically decamped financially from their country and, to add insult to injury, have much of the political system at home under control.  They and other vested interests close to the state sector form an unholy alliance to stand in the way of making sensible reforms. 

As a result, it is not Greece, but the outcome of reforms in France that will ultimately decide about the need to fundamentally reconsider the future shape of Europe.   Greece is but an opening gambit in a much larger battle.


Who is Wolfgang Schaeuble? To answer the personal aspects:  There are no indications that a truly traumatic event that occurred in 1990 has had any personality-altering consequences.  That year, Schaeuble was shot three times during an election campaign event, an incident which severely injured his spinal cord and left him paralyzed.  He has had to use a wheelchair ever since.  Despite this hardship, Schaeuble’s energy level is enormous. 

True, Schaeuble is a tough taskmaster and hard worker, but he balances that with an irrepressible penchant for humor – a rare feature in any minister of finance.

Schaeuble is a lawyer by training.  But while that is held out as a professional deficiency by many economist-commentators (think Paul Krugman), being a lawyer simply translates into a well-honed ability to think about power structures and to maneuver constructively in grey zones.

When the German finance ministerand indeed many national parliaments in Europe—looks toward Athens, their joint working assumption at this stage is that the Greeks are sadly in a self-destructive mode.   Not only is capital flight is rampant, which is a powerful vote of no confidence by Greeks themselves, but the ruling Syriza Party may well be on the verge of nasty infighting. 

Most crucially, there still is no consensus whatsoever inside Greece to tackle the challenges that it must tackle to save itself—irrespective of whether it is inside the Eurozone or not.  The various political parties have a pattern of either blaming each other for the mess the country is in or they unite periodically to blame “foreigners” (and preferably “the Germans”) for Greece’s problems. 

However, engaging in such finger pointing—no matter how resolutely—leads nowhere.  Greece’s real problem is not “austerity,” but rather a dysfunctional domestic political economy.   Take all the debt away that is there now, wipe the slate as clean as you want and you will most likely find the problem stays the same:  Who will lend money to the government?  Who will invest in a country with such a penchant for infighting and a mega bureaucracy?

The tragedy of Greece is that, while the country has benefitted for decades from EU transfer payments, as well as low interest rates after joining the euro, it has very little to show for all that. Many of these tangible benefits—supposed to be investments in Greece’s future and its ability to close the gap to the rest of Europe—have been wasted, via corruption or a bloated state sector. In that regard, Greek political life is remarkably united: It applies regardless of whether the government at the time was from the “right” or the “left” of the political spectrum. 

A country that is incapable over decades to build up a reliable tax collection infrastructure ultimately has a near-death wish against itself. That is not “Northern” (or German) arrogance, but a fact of economic life anywhere on the globe. 

Pair that with the prevailing level of capital flight—a regular feature—as well as the fact that many enterprising Greeks have long chosen to pursue successful careers abroad, and you will find that the logical conclusion is for Greece to exit the euro, for Greece’s own sake. 

Yes, the Greeks want to be inside the Eurozone. But as long as they are incapable of generating the domestic consensus required for reforms, that is a prescription for disaster.

Mind you, Germany won’t push the Greeks out. It can’t. But Greece is also running out of options. The pressure of operating inside the straightjacket of the euro is just way too tight for the country to be able to cope with. As things stand, Greece may exit from the Eurozone via that sublime neologism, a “Grexident.”

Many analysts argue that Greece can regain its competitiveness by devaluing its own currency. German policymakers, Schaeuble included, have severe doubts that this is a solid pathway for the future. Devaluations reset the clock for a while, but too often they end up keeping countries from undertaking the necessary structural reforms to strengthen the underpinning of their economies.

Also, a big concern for the Germans is Italy, which exhibits a Greek-style inclination to have its cake and eat it, too. Like Greece, Italy is an asset-rich and cash poor country in which many people prefer to operate “off the books”—neither of which favors smooth tax collection. 

However, Matteo Renzi, Italy’s youngish left-of-center prime minister, is fighting a valiant battle against all that. He has the will and the determination to get Italy unstuck. He understands that things have to change if Italy is to regain a solid economy and pathway to the future. 

This is an effort that the German government supports whole-heartedly. So far, Renzi has proven an agile maneuverer inside the morass that is Italian politics. True, the big battles still have to be fought out in Rome. But at least the “smoke signals”—even if they are not emanating from the Sistine Chapel in this case—give reason to keep the fingers crossed.  

Finally, what the battle in Europe boils down to is the proper understanding of “solidarity.” Does solidarity mean to help those who got into trouble (temporarily), due to some adverse circumstances, and who are asking their partners for some help while they are focused on fixing things at home? Or does “solidarity” mean that nations that are essentially unwilling and/or incapable of changing their underlying economic structures and political bargaining deals should be able to preserve their political preferences—even if they don’t have the funds or capital available to do so? 

That is what key people from the Greek left to the French left believe—some God-given “right” to be financially supported by others. They are in for a rude awakening. No nation is wealthy enough to engage in such a one-minded deal. It is the proverbial bottomless pit.

And that is precisely where Schaeuble draws the line. So do most other (Northern) European nations.

Stephan Richter is publisher and editor-in-chief of The, the daily magazine on the global economy, politics and culture. Follow him @theglobalist. (Estados Unidos)


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