German heavy artillery against Brussels and Paris

In Eurozone the confrontation between ‘austerity lovers’ and ‘relaxationists’ presented a new and course changing sequel last week, with German heavy artillery fire towards Brussels and Paris. The German Federal Minister of Finance, Wolfgang Schäuble, accused the Brussels Commission and personally the President Manuel Barroso for delaying the realisation of EU programmes to fight youth unemployment in Greece and Portugal. The line of fire was then strengthened by Jens Weidmann, President of the Bundesbank, the German central bank and member of ECB’s Governing Council. While Schäuble was accusing Brussels actually for nothing, Weidmann concentrated his criticism to Paris. Both of them, however, didn’t make any reference to the deepening recession in Eurozone. Let’s take one thing at a time. Schäuble’s latest contribution to the fight against the Brussels ‘relaxationists’ came with his speech in the 16th International WDR Europaforum, entitled this year “Europe the Future!” and held on 16 May at the Federal Foreign Office in Berlin. He directly accused Barroso and the European Commission of falling behind in the application of EU programmes meant to alleviate youth unemployment. It must be noted that Barroso was the key speaker in this year’s WDR forum. But this in reality is an overstretched argument not worthy of more discussion. Of much more interest is what the German minister has to say about the European Banking Union. No low-interest loans Before accusing Barroso and the Commission last Thursday, the German Federal minister of Finance had advertised with an article in the prestigious daily ‘Financial Times’ his all-out opposition against those who support growth over austerity. In that article he more or less rejected the enactment of the European Banking Union. On 2 May the European Sting writer Dennis Kefalakos noted: “The Eurozone group of countries which back the growth argument, comprising today apart from Italy and France the entire southern periphery plus Ireland (and the European Commission), will most probably find a strong ally in the Governor of ECB. Mario Draghi insists that the central bank’s monetary policy has to be freely transmitted all over the Eurozone, to reach all the small and medium enterprises (SMEs) of the euro area. That is why he insists… that the Banking Union must be enacted the soonest possible”. In view of that prospect Berlin has changed its mind about this new EU institution, because it could offer to the weak economies cheap loans at interest rates similar to those today applied in Germany. In this way the most important comparative advantages the ongoing crisis has supplied to this country would be neutralised. Schäuble in his FT article wrote: “The merits of a banking union are rarely disputed. But there is a debate about how to shape its governance and accountability…In the past decade, public and private debt levels have rocketed…Yet pursuing this clean-up exercise (bank resolution and recovery) swiftly and without burdening taxpayers will require more than cross-border supervision (by the European Central Bank). It will need a mechanism to restructure or wind up the weakest banks… The best way to break the link between banks and states is to ensure that enrolling taxpayers to rescue banks becomes the exception rather than the rule”. Again Germany returns to its core opposition to growth economics, rejecting the possibility of Eurozone’s banking system being fit to operate prudently under the control of ECB, in a hopefully soon to be created European Banking Union. In this respect Mario Draghi has made as his prime monetary policy target the defragmentation of Eurozone’s financial and banking system, so as the currently disconnected countries from the mainstream European markets to return to the system. The key tool for that is of course the Banking Union. It is exactly what this Germany wants now to block, raising institutional issues and demanding “more than cross-border supervision”. After the German minister, came the turn of Bundesbank President, Jens Weidmann, to support the fragmentation of Eurozone’s financial markets and even issue political warnings against countries like France, not to relax their austerity policies. It is unacceptable though for a career economist, whose major achievement so far was to write Merkel’s speeches for G8 and G20, to fire political shots against France. This is probably one more sign of the German lack of respect for the rest of the EU countries and political leaders, coming from a man who got his present job by being one of Chancellor’s men. Weidmann speaking in an interview at yesterday’s ‘Bild am Sonntag’ newspaper clearly supported the position that the German SMEs and all borrowers in general should continue in the foreseeable future, paying for their loans much lower interest rates than all others. He insisted on that even in a case when the business risks are exactly the same, just because the others are not based in Germany! This is what this career economist blessed by Merkel said: “The interest rate applying to a capital investment project is an expression of the opportunities and risks which the project entails. If one enterprise’s prospects are not as good as another’s, that is quite rightly reflected in different interest rates. The economic and political environment in the relevant countries also plays a role here, of course”. He didn’t explain which are the differences of the political environment, for example in France, compared to Germany. Probably he meant that his lady boss in Berlin is more effective in selecting the President of the central bank. It is deplorable the central banker of the leading economy of Eurozone to be seen as trying to introduce a political country risk element in Eurozone markets. As if Germany were more politically stable than France, Spain, Ireland or Portugal. He forgot to say that with the enactment of the Banking Union, the ECB will guarantee the prudence of all the 200 Eurozone banks, which are to be placed under its control and guidance. As a result all those banks in the 17 euro area member states will be free to assess the credibility of each and every loan request they receive without political glasses. All those banks themselves will carry the seal of ECB’s audit and their creditworthiness will be assessed by markets exactly with the same financial criteria as the German lenders. Obviously it is this prospect that this career economist wants to avoid. An economist’s advice Unfortunately Weidmann didn’t stop there. He went as far as to give political advice to the French government about how to manage their country’s economy. He said that “As a heavyweight in the monetary union, France has a special role in setting an example. At this particular juncture, when we have set more stringent rules for ourselves on deficit reduction, we should not place the credibility of these rules in jeopardy by completely exhausting their flexibility. What we need now is confidence in the readiness to sort out public finances”. In short he is pointing a finger to Paris for “exhausting the flexibility” of rules. This is a direct reference and an obvious disapproval of the two more years accorded to France by the Brussels Commission as extra time, in the quest of Paris to reduce fiscal deficits below 3% of the GDP. Of cause this was not a special treat. The same extra time was accorded to Greece, Italy, Spain, Portugal, Ireland and Holland. The German wanted France to “set examples” and is accusing it because she didn’t. After that remains only his country to set paradigms. Obviously those German interventions are indicative of the intentions that this Berlin government coalition nurtures for Europe, if re-elected. Towards this prospect the rest of Eurozone must prepare its policy lines to counter the Teutonic campaign to direct the EU strategic developments towards Berlin’s own interests. Politically, though, the next German government after the September elections will be more open to pressures from the rest of Eurozone countries. In view of that during the next few months almost all the euro area governments and the Brussels’ authorities will let go the German excesses without much opposition. After September however the scenery will be quite different.