Sunday

5th Apr 2020

Analysis

Eurozone crisis tests the Merkel method

German Chancellor Angela Merkel does not like rash decisions.

A step-by-step approach, carefully preparing the ground for any policy change she may envisage has become her signature style. As a natural scientist, she has no sympathy for irrational behaviour, for panic or enthusiasm displayed either by fellow EU leaders or markets.

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  • Angela Merkel hates taking decisions under market pressure (Photo: bundeskanzlerin.de)

Speaking at an event in Berlin on Friday (15 June) organised by an association of German family enterprises, Merkel praised their "steadfastness" and their "long-term thinking" as opposed to the "quick buck mentality" of financial markets.

"In times of fast-changing environments, where financial markets are increasingly gaining importance, where bets are made several times a day, this steady, long-term oriented family business culture is a very important counterweight," she said.

Sound budget management and reluctance to take on debt are virtues the she cherishes most. It is her firm belief that the same should apply to states.

The financial crisis, followed by the euro-crisis are to her mind symptoms of the same reckless behaviour of running banks or whole economies on debt and deficits.

The daughter of a protestant pastor, Merkel has a near-religious conviction that by cutting deficits and rolling back debt economies will be cured of all ills.

She backs "sustainable growth," as opposed to growth based on credit, consumerism and real estate bubbles. Slashing labour costs, making budget cuts, investing in innovation and education are the recipes she advocates for all countries, including her own.

Her insistence on "living within one's means," as the family businesses in her view are so good at doing, is a pre-condition for the European Union to succeed and keep up with competition from India, Brazil or China.

It is why she fiercely opposes any common debt issuance in the eurozone, as France's new president Francois Hollande is advocating, which would allow southern euro-countries to borrow money at more accessible rates than now.

Eurobonds would be nothing but a "quick fix" and a repeat of the same mistake that brought the eurozone in this situation in the first place: cheap money with no structural reforms, says Merkel.

The only way Berlin could agree to a form of such common sharing of debt would be for a true political union to be created among EU states. With the European Commission acting as a government, common taxes and a more powerful European Parliament. Even with a European army, at some point.

This would require not only a change of the EU treaties, but also a referendum in Germany to modify its own constitution, as any budgetary, military or social powers transferred to Brussels would be in breach of the current basic law.

But Merkel is determined to stick to her guns. Too much is demanded - especially by France - without any willingness to cede sovereignty and beef up the EU scrutiny over national affairs.

"It cannot be that we put liabilities at community level, but that checks and balances remain at national level," she told the family business community, recalling that when the euro was created, there were two so-called convents - one working on the monetary union, one on the political union.

"The political union discussions did not materialise, so we need to catch up with that," she said.

When the last German concession was made earlier this year - the creation of a permanent bail-out fund for the eurozone - Merkel pressed for a pact signed among all EU countries except Britain and the Czech Republic enshrining a debt brake into their national law.

But she had to give up two conditions which now she will press for again: countries to be taken to the European Court of Justice if their budgets are not in line with the debt brake and with the goal of cutting debt by 1/20 each year when the total debt exceeds 60 percent of GDP.

Having the institutional structures in place first and only then pouring money in them is the preferred recipe of Angela Merkel and her coalition partners.

But as Spain's costs have reached bail-out territory and uncertainty about Greece's eurozone membership continues, the Merkel method may stretch the cord too far this time around.

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