Here again was Merkel's freedom, the freedom “that Europe needs in the same way as it needs air to breathe”. Because “where it is restricted we wither away”. But she goes even further, asking the crucial question: What allows human beings to see profit in diversity, and deal responsibly with their freedom in all that diversity? The answer: tolerance. “The heart and soul of Europe is tolerance. Europe is the continent of tolerance.”
Is a German Chancellor allowed to say such things? Is she allowed to speak of tolerance when German intolerance has brought Europe to its knees over and over again? Following her reasoning, the Chancellor had no choice: she had to say it. “It has taken us centuries to understand this. On the road to tolerance we have had to live through many disasters. We have persecuted and annihilated one another. We have laid our own country waste. […] The worst period of hatred, devastation and destruction happened not even a generation ago. It was done in the name of my people.” If this is the case, said Merkel, in a warning about showing arrogance towards others, to all those who have difficulty with the idea of tolerance, then Europe has a duty to exercise tolerance and encourage it wherever it is found. “We must be thankful that everything we Europeans have ever achieved is due to our contradictory nature,” said Merkel, quoting the writer Peter Prange, “to the eternal conflict within ourselves, the constant exchange of opinion and counter-opinion, idea and counter-idea, thesis and antithesis.” So why should Europe not succeed? Merkel's answer is now well known: because Europe has learnt the value of tolerance. But shortly after her speech, that tolerance was to be put to a severe test.
To understand Merkel as a politician dealing with crises, we must spend a moment in the pre-crisis phase, the time of policy speeches and professions of faith. Europe requires its political figures to produce a constant stream of such statements. It seems to have a definite thirst for them. In Brussels, think tanks offer an environment for all manner of deep reflection. In Berlin there is a well-established series of speeches delivered at the Humboldt University, the “Humboldt Speeches”, in which guest speakers bare their political soul. Berlin's “Europe Speech”, a theoretical rather than topical address on “the state of the Union”, is made every year. And then there is the prestigious Charlemagne Prize.
Merkel has spoken widely on principles. She has won the Charlemagne Prize and given the Europe Speech. But like other leading European politicians she failed to foresee the existential crisis that seized hold of Europe in the autumn of 2009. Not once did she analyse the budget deficits that might be caused by a currency union without a common European economic policy. She never drew up a plan for repairing Europe's greatest weak spots. The first sign of any action plan for dealing with the crisis came in her Humboldt Speech in May 2009, six months before Greece's disclosure of its deficit. Here, with remarkable foresight, she pointed out that European policy was the same as domestic policy – a year later the Bundestag would be dealing with precious little else.
Merkel's reference to the Constitution is also important in this context: the Federal Republic states that its aim is “to serve the cause of world peace as a member of a united Europe with equal rights” – these words are from the preamble to the German Constitution, and were crucial in evaluating the crisis three years later, when the Constitutional Court had to decide on the legitimacy of transfers of sovereignty, because for all those who support Europe, the reference in the preamble is evidence that there is no contradiction between the Constitution and the European Union. Merkel made that clear in a major political statement: “Germany has always understood European unity as part of its reasons of state.” Once again she refers to reasons of state, something that she usually mentions only when speaking about transatlantic relations or Israel. But nowhere is it more important than in Europe. Without Europe, Germany is nothing.
Merkel could be said to see Europe as the most important German interest. So she dislikes Germany being referred to as the “paymaster” of Europe, because Germany profits a great deal from the internal market, and derives a huge political advantage from its integration in the EU. In her Humboldt speech, Merkel also argued that Europe could not go on accepting an unlimited number of new member states. Consolidation, the improvement of existing structures, comes before expansion. Nor can consolidation mean that Brussels acquires more and more power by the back door. “The nation states are masters of the treaties” has been a favourite saying of Merkel's during the crisis. Those who measure the EU by “the standards of constitutional law”, giving the European Parliament the right to make new laws or shift even more power to Brussels, will only help “overtax the system and set off alarm bells”.
Merkel had got her own European house in order before Europe itself put her to the test. She struggled with the system, which she felt wanted to extend its powers, and struggled with the impatience of individual nations, who preferred to be in a Europe that moved at different speeds. At that point, Merkel was reluctant to admit such a system was plausible, because, as she said, “Are we to throw out the MPs from the countries that don't work with us? Then who will make the decisions? That would destroy the whole structure of the European Union.” In fact the Chancellor became quite heated over this question. “So I would ask those who propose such ideas to think again.” Three years later – in the very depths of the crisis – her principles no longer sound quite so set in stone. Merkel had thought again, and accepted that it was possible to go at different speeds. She had prudently given herself a way out in 2009, when she said: “I may have overlooked something, but I don't think so.”
There was something else that she had been wise enough to make clear in advance to her domestic audience: she would not produce any financial blueprints – at least, not publicly. In his Humboldt Speech many years earlier, Joschka Fischer had set the standard when he spoke about finality. She was not going to contribute to the finality debate, or answer the all-important question of what the EU might be like when its structure was complete. “I shall have to disappoint you, because I think that long-term aims […] sometimes make it difficult to take the next necessary political step.” Her message was that anyone speaking of finality robs himself or herself of flexibility. As a tactician, Merkel was not going to fall into that trap. She would rather study individual trees than praise the beauty of the whole forest. You never know: one day you might get lost in the forest.
Greece's Disclosure
The crisis really began on 15th September 2008, with the bankruptcy of Lehman Brothers. In its final year, the CDU-SPD coalition was struggling to prevent a spectacular collapse of the economy, and had only a few weeks to make decisions about guaranteeing huge funds, saving the banks and providing a stimulus to the economy. By October 2009 the crisis had only shifted – into the budgets of the European states. Everywhere, national debt was growing, governments had come to the aid of failing banks, thereby exposing themselves to risk. When the Papandreou government, elected only that month, took advantage of this new beginning to revise its estimate of Greece's budget deficit, there was no immediate outcry. People had been expecting bad news from Athens: the budget deficit amounted to twelve instead of six per cent of the gross domestic product.
It was a few weeks before the significance of this announcement sank in. Twelve per cent of GDP far overstepped the debt limit set by the EU, but there was no indication as to how it might be adjusted. Not only that, but the total amount of debt was phenomenally high. This had immediate effects on the financing of debt: creditors in the international financial markets put enormous surcharges on Greek state borrowing. As early as December, the ratings agency Fitch was the first to downgrade the country's credit rating. Borrowing money became prohibitively expensive for Greece.
A vicious circle set in, and no one could break out of it in a hurry. High debts, a high demand for credit; high surcharges with even more expensive loans – a chain that could be broken only if the state reduced its debts. But then the economy had to grow. For that to happen, in
come from taxation had to increase sharply, and for that to happen high-interest loans had to be lowered and spending cuts made. Social-security, pensions and healthcare costs had to be significantly reduced. And for that to happen, civil servants would have to be made redundant and taxes raised. Every economist understood the task that faced Greece in theory. But in practice it was extremely difficult, and Greece and its politicians are notoriously incapable of taking decisive action.
Nor could Greece be put into quarantine, although its problems were infectious. Everyone realized that this vicious circle might end in the state declaring itself insolvent. Greece would go bankrupt and be unable to pay its debts. States in this unfortunate position usually reset the counter to zero and either issue a new currency or devalue the old one. But for Greece that was impossible, because all transactions were in euros – as they were in sixteen other countries of the European Union. If Greece were allowed to go bankrupt in an uncontrolled way it would take some other European states with it.
The second problem was that Greek banks are closely linked to other banks in Europe, and foreign banks were holding vast amounts of worthless Greek loans. A sudden bankruptcy would not just mean the collapse of one single bank in Greece: it would set off a domino effect with unforeseeable consequences, perhaps affecting the Deutsche Bank or the Commerzbank in Germany. Financial failure would cut Greece off from the economic area, Greek reserves of euros would exceed the limits – and the country would no longer be able to pay for vital goods and services from abroad. All manner of dark, gloomy scenarios were envisaged, with mass emigration and unrest in various trouble spots. Things couldn't be allowed to get to that stage.
But was a controlled exit an option? Could a deal be reached on Greece's departure, cushioned by agreements and plenty of cash? Greece would have to leave the Eurozone and introduce a new currency – with all the risks that were involved for the banks and the economy. The Papandreou government soon made it clear that it was not interested in this option. And it had the law on its side: a nation cannot be thrown out of the European Union: the treaties do not provide for such an eventuality. A parting of the ways could be quite ugly, and the euro itself would be irreparably damaged. It wasn't a question of states who were solvent being able to threaten Greece: it was the crisis states, which would later include Spain and Italy, that made the club of richer states tremble.
The essence of the crisis has not changed. The dilemma became even clearer when Ireland and Portugal asked to be included in the rescue plan, and then Spain and Italy found themselves in stormy waters. At this point it became evident that the problem was not only one of debt, but that the Eurozone had a major flaw in its construction that couldn't be remedied by pouring in money or by throwing out Greece. Europe was not simply undergoing a currency crisis; the community, and particularly the countries of the Eurozone, was under fire from three directions: there were clearly states that had too much debt; there were huge disparities in competitiveness between the economically dynamic and stagnant countries; and no political mechanism had yet been created that could help avert a disaster such as the one that was threatening Greece.
It was the markets that mercilessly revealed this triple crisis. Everywhere in Europe there was loud condemnation of “the markets”, of anonymous hedge-fund managers and investment sharks who made a living at the expense of indebted countries, drove up interest rates and lined their pockets by betting on future developments. It would be several years before the furore died down. It wasn't until 2012 that people realized that the markets were acting in a perfectly logical way. And that the markets also included the pension funds of firms such as Siemens and Volkswagen, savings funds and ordinary people with one thousand euros placed in rock-solid investment funds. Should these investors be blamed for preferring to lend their customers’ money to countries whose economies had better balance sheets, that were competitive and had modern, productive industries?
No, Europe was on the wrong track, a fact that the markets had exposed in the wake of the debt crises; the Eurozone may be a currency area, but it is also an area of very different competitive forces. If this diverse bloc enjoys the advantage of having the same monetary policy, if all the countries are able to borrow money under the same conditions despite their different abilities, then there is a problem. It simply couldn't work like that.
After 2010, one advantage of the crisis was that not only did every Member of Parliament get a free crash course in economics and monetary policy, but so did every intelligent member of the public. And yet for a long time the crisis seemed to be an abstract concept in Germany: while the fifty per cent of young people who were unemployed in Spain and property owners in Ireland soon had personal experience of the effects of a currency crisis, the Germans had either to take the Chancellor's word or ride the emotional rollercoaster of the evening news, in which sometimes the Greeks were thrown off the tracks, or furious MPs roared “Enough!” and demanded the return of the Deutschmark.
It was clear that there was no simple solution, as the Chancellor realized on 23rd April 2010, when the Greek government applied for aid from the European Union and the International Monetary Fund. From that moment on, nothing in Europe would ever be the same: all European feel-good rhetoric came to a halt, and the Union turned to political infighting. Anyone who still believed that they were living in the United States of Europe was soon disillusioned: every state suddenly became a nation state, a phase of hardline self-centred politics had begun – and interests were defined by national borders. Europe was now in a state of political emergency, and its leaders were at times plunged into existential crises. The continent saw a resurrection of prejudices long thought dead and buried, and realized that its community was built on sand. For even if no politician – and certainly not Angela Merkel – dared to speak the plain truth, the crisis had the potential to destroy the European Union. If a single country left the Eurozone, it would prove that Europe was unable to keep up in the globalization race, that it was reverting to being a number of small states with many minor currencies, old-fashioned and with no power to innovate. The biggest experiment of the century, an attempt to reconcile and pacify a notoriously unstable continent, was in danger. Anyone with a sense of history might well have felt uneasy during those months of crisis.
At first, Angela Merkel herself didn't understand the full extent of the crisis. No one did. Even as she was addressing the new intake of students in the Einstein year in Bruges in November 2010, she was praying for inspiration. Only in the middle of 2011 did she begin to speak with any certainty about the causes and effects of the crisis. Yet even then it was clear that the crisis fed off the surprise factor, that unforeseen problems were constantly emerging. “Driving blind” was a much used metaphor in the Chancellor's office. It must have been depressing for Merkel, who likes to work systematically, to find that the crisis refused to reveal its inner workings. European politicians worked their way through the problems, continually surprised by new developments and new incidents, terrible new figures and frustratingly endless discussions. In a highly complex mechanism, cogs began turning in the form of monetary and economic policies, immediate reactions to crises and long-term plans for security, domestic politics and constitutional law. Election dates, resignations, parliaments, discussions – all these things took time, and time was the most valuable commodity of all, one that Merkel sorely missed in her search for stability.
If there was one thing the Chancellor felt certain about far too soon, it was her mistrust of the quick solutions that were being brought to her attention, and which were provided by the many external advisers. It was the reason why she increasingly cut herself off from them. The 2008 banking crisis had taken her by surprise; the government had been ill prepared for the full extent of the problem. There was perhaps a handful of experts among its ranks who could explain short-selling, derivatives and collateral debt obligations. One evening has stuck in the memory of Merkel's advisers: Josef Ackermann, then CEO of D
eutsche Bank, explained the system of value adjustments to Merkel using bottles of expensive red wine. If you have 500 bottles, each worth 500 euros, in your cellar, and you sell one of those bottles for only 100 euros, then the value of the other bottles has to be reduced accordingly.
Merkel and her team learnt their lesson from the wine-bottle example. The Chief Economic Adviser in the Chancellor's office, Jens Weidmann, set up a special unit to save the banks, recruiting people who were specialists in the capital markets. He himself was the leading expert on European monetary policy, having written his PhD on the subject. Anyone who wishes to understand Merkel's crisis-management policy must first understand this economist, born in 1968, who is the Chancellor's typical colleague of choice: discreet, workaholic, highly intelligent. Thomas de Maizière, the Minister in the Chancellor's office, has called him a bright spark.
Merkel and Weidmann are very similar: both are analytical, cautious, mistrustful. So it was not surprising that Weidmann's hackles were raised early in May 2010, when a fund was created virtually in the space of a weekend, because the Council of Europe wanted to fill it with money, simply to give a clear signal to the Greek request for aid. On 2nd May, finance ministers had approved a rescue package of 110 billion euros, but that had left the markets unimpressed. Speculation on Greece continued, so the Eurozone decided to set up the EFSF, the European Financial Stability Facility, as a form of safety net.
Merkel objected, saying that she needed time to think about it, and on 8th May went to Moscow for the celebration of the fifty-fifth anniversary of the end of the Second World War. Even on the dais during the veterans’ parade she was bombarded with questions by the Russians and Chinese. At the end of the weekend she agreed to the creation of the fund, but on two conditions: the money was conditional on results and the International Monetary Fund had be involved as a form of safeguard, because IMF rules could not be broken, even by Europe's debtor states. Germany felt protected by the involvement of the IMF. When the safety net was set up, it provided a breathing space, bought time – time to understand the crisis, to try and counter it and calm things down.
Angela Merkel Page 19
