© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
June 20, 2012 6:55 pm
There is a strong sense of déjà vu in the eurozone. The conundrums over economic and monetary union – whether Greece gives up, Spain messes up, Germany pays up, France seizes up – are complex. However, behind these lie historical patterns.
We have just witnessed further twists. Greece may have a new coalition government but it faces the same old problems in implementing the terms of its bailout deal. The €100bn rescue of Spanish banks, on relatively undemanding conditions, is likely to exacerbate angst among the Germans, Europe’s main paymasters, that creditors are treating the debtors too generously. Precisely the opposite sentiment is on show in Paris, where President François Hollande accuses the Germans of imposing destructive austerity on eurozone debtors.
These contemporary diplomatic manoeuvres and tensions are reruns of behaviour in the febrile build-up to the launch of the single currency in 1999. All the scenes in the eurozone drama have been played out many times before. Take, for example, the belief that political and fiscal union is necessary to make monetary union work. Helmut Kohl, the former German chancellor, said in 1991 that monetary union without political union would be a “castle in the air”.
Similarly, the economic dislocation facing southern Europe is not new – nor was it unanticipated. Bundesbank officials said publicly 15 years ago that profligate states that could no longer devalue would face wrenching unemployment and social upheaval unless they controlled costs. Gerhard Schröder, Mr Kohl’s successor as chancellor, said in 1998 that Germany would dominate the economic and monetary union because it would manage its costs better.
The rescue saga, where fear of catastrophe forces Germany into last-minute concessions, is all too familiar. After the fall of the Berlin Wall in November 1989, President François Mitterrand of France, cajoled Mr Kohl into accelerating moves to economic and monetary union by threatening Germany with the kind of isolation that led to two world wars. Germany grudgingly accepted Italy as a founding eurozone member country in 1998 partly because Bundesbank officials feared a spurned Italy would devalue the lira and so gravely damage German companies.
German obduracy in the face of French demands for more funding has been repeated countless times. In a precursor of today’s strains, Germany refused in 1968 to give in to strong US, French and British pressure to help other currencies by revaluing the Deutschmark, although it relented a year later. “The French want to put shackles on what they see as our sinister monetary policy,” wrote Otmar Emminger, former Bundesbank board member and president, in 1970. In 1981, after Mr Mitterrand’s election victory, the Bundesbank called for French devaluation, asking: “What do they really want?” The Bundesbank again threatened the French with devaluation in 1992, softening only when Mr Kohl intervened. Mr Kohl and President Jacques Chirac nearly came to fisticuffs in 1996 over French pleas for relaxed budgetary stringency.
France’s perennial refusal to give up fiscal sovereignty explained why an earlier plan for economic and monetary union failed in the early 1970s. Germany’s current insistence that mutualised liabilities through eurozone bonds or Europe-wide deposit insurance can come only after full-scale economic convergence echoes Germany’s 1960s and 1970s view that monetary union should be delayed pending full economic harmonisation. Germany’s European lecturing has a long pedigree. Willy Brandt, former German chancellor, told his finance minister in 1970 to “stamp our hallmark” on monetary union plans so that “our monetary policy views prevail”.
As the costs of either breaking or underpinning the eurozone rise to giddying heights, the big question is whether the Germans, once again, will give in to neighbours’ pressure for more money. George Soros, whose investment fund made an estimated $1bn in betting against British currency policies in 1992, says the Bundesbank is again the key player. Today’s dilemma is much more fraught. In 1992 Germany rejected the UK but stuck to the alliance with France to prevent the exchange rate mechanism from shattering. This time, its own currency is at stake. The risks and rewards are many times greater. And German public opinion is increasingly eurosceptic.
The danger is that creditors’ and debtors’ contrary reactions will be self-reinforcing. Greece’s new leaders may see the Germans’ partial climbdown over the Spanish bailout as a sign that Greece can repudiate its debt with impunity. German politicians may move in the opposite direction: with a backlash against perceived softening and an insistence, next time, that Germany will not relent on conditions for debtors – especially for Greece. The lesson of economic and monetary union brinkmanship over many years is that the Germans always give in – until the time they don’t. That moment may be approaching.
The writer is co-chairman of the think-tank OMFIF and author of ‘The Euro – The Battle for the New Global Currency’
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in