Bill Emmott - International Author & Adviser


Germany is speaking with an English Accent
The Times - December 5th 2011

We know our traditional response, for Punch recorded it a century and a half ago: “Who’s ‘im Bill? A stranger? ‘Eave ‘arf a brick at im.” And when the stranger is German, when the subject is the euro, and when a political leader from that country has claimed, rather arrogantly, that “suddenly, Europe is speaking German”, we tend to start lobbing the whole pile. Yet this is a mistake. For if Europe is speaking German, it is doing so with an English accent, even a rather Tory one.

            There are good reasons to be sceptical about whether Germany’s approach being pushed this week ahead of the European Summit on December 9th, will actually save the European single currency, and thus avoid a potential cascade of bank collapses and a new, deep, recession across the whole continent. We’ll get on to that in a minute. But first, to be more cheerful, let us imagine how life would be if the German solution were to work.

            What is it that Conservatives of the Thatcherite persuasion say they want? A smaller state, and one that follows the housewifely, Micawberish, virtues of thrift that she espoused. A liberalised, deregulated economy in which free enterprise is encouraged, state assets are privatised and the necessary dynamics of creative destruction can do their work. And, in the European Union, they have wanted a system in which one country (especially Britain) does not have to clear up the messes and pay off the debts of others.

            That is exactly what Germany is insisting on. The version of a fiscal union that Chancellor Angela Merkel seems to have forced President Nicolas Sarkozy to accept is one that consists of a straitjacket of rules made especially for Wilkins Micawber, and no promises of transfers from Germans or other rich taxpayers to profligate southerners.

            Rules to limit budget deficits and the size of public debts do not guarantee a small state, if voters are willing to accept higher taxes. But that has patently not been true of southern Europe anyway, and it is hard to see how countries can get from debts of 100%-plus of GDP to the desired 60% without cutting government back, pretty sharply. Moreover, the reforms to boost growth and competitiveness the Germans are pressing Italy, Greece and the others to implement are already firmly liberalising ones.

            There are, it is true, flaws in this argument. The Germans, like most people, do not practice consistently what they preach. They were one of the main assassins of the “Bolkestein directive” which sought to extend the European single market in goods to the much larger, services sectors. A version with its fangs removed was passed, after much dispute, in 2006. Ironically, if Italy’s new prime minister, Mario Monti, succeeds in implementing liberal reforms in his country, many of his measures will fit in with the thwarted ideas of his former colleague at the European Commission.

            Moreover, it was Germany that, along with France, destroyed the credibility of the euro’s original rules, its “Stability and Growth Pact”, by breaking its budget deficit ceiling of 3% of GDP. The Germans now want to replace that pact with a “stability union” based not on promises but on a treaty and the European Court of Justice, so it would be fair to ask why this new system would be any more credible. As before, small countries might cower before the rules and the ECJ, but why should France or Germany?

            There is an answer to these objections, at least in Germany’s case. It is that the Germans have seen the alternatives, and are terrified of them: one is Germany (and other rich creditors such as the Dutch) guaranteeing the debts of other eurozone members in perpetuity (ie, not just while that nice Mr Monti is in charge in Italy); the other is the currency’s collapse. So they are going to be determined to make the rules work, this time, as they do not want to be the eurozone’s Milchcow. And perhaps finally they can see that deregulation, even of services, will be the only way to boost growth.

            Thus, the Germans are speaking with an English Tory accent. Britain can even watch this happen, encourage it along, benefit from the results, and retain its own monetary and fiscal sovereignty by staying outside the euro. What more could we want?

            Well, we had better shed our cheerful note of Thatcherite triumphalism and ask that boring question about whether the solution currently on offer will actually bring the euro crisis to an end. Unfortunately, it won’t.

            The “stability union” the Germans are pushing for will take years to establish. Even if all 17 euro members say now that they agree to it, markets will have plenty of reason to worry that it might unravel during the real negotiations and when referendums are held in some member countries. The rules might anyway not be enforceable, even by treaty. But leave that aside, for the moment: the biggest objection is that this “union” would aim to avert tomorrow’s crisis, not cure today’s.

            So the real question for the EU summit on Friday is what else is going to be done to make investors believe that Greece can afford its debts, even at a discount, and that Italy, Spain and the others can too, without any discount. The European Central Bank seems to be being lined up to relax its objections to buying huge amounts of Italian and Spanish bonds, but that will offer only temporary help, as will a new big loan from the International Monetary Fund.

            The missing ingredients remain two. One is a clear, sustainable distinction between the evidently insolvent Greece and the rest. Without that, investors will keep on requiring a “might soon be like Greece” premium to Italian and other bonds. The second, previously an alternative, is some form of collective guarantee for sovereign debt of just the sort the Germans have fiercely opposed.

            I say “previously an alternative” because now, with this stability union proposal, there could be a chance to combine them. Greece should be expelled from the euro, to show that the rules are genuine, since it would have no hope of meeting the new treaty’s requirements any time soon; for those remaining inside, a new, time-limited, mutually guaranteed Eurobond could be issued, tied to the policy frameworks required for eurozone members to reach the targets for debt and deficits laid down in the new treaty by, say, 2020.

            German voters would have to be persuaded to gulp and swallow this on the basis that the guarantee is temporary and that no taxpayers’ money would actually cross borders to subsidise the profligates. They would have to be pragmatic: rather English, really.



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