FT: Can we begin with G20 summit in Seoul? I have the impression that the G20 is divided into two camps: debtors and creditors. How can one forge a new consensus?
Angela Merkel: For a start, I think the G20 is a very interesting size, because it brings together the traditional industrial countries and the emerging countries, which means that almost 90 per cent of global gross domestic product is sitting at one table. We can work well together in this framework, and especially in the global economic crisis, the G20 has proved its worth.
Now that we are hopefully moving again towards sustainable global growth, the challenge is to develop the G20 agenda further. That begins now, and will be the main task of the French presidency in the coming year.
The member states are all in different situations. It’s true that many industrialised countries have a high level of public borrowing, and other countries have substantial assets. But this difference is not decisive in G20 co-operation.
FT: But isn’t there a fundamental imbalance in the G20 between those with the debtors and the asset-holders?
AM: As I said, the traditional industrial countries, whether it’s the European member states or the USA or Japan, are highly indebted. Others, especially China, have huge reserves. That is precisely why we agreed in Toronto that the industrial countries should halve their indebtedness by 2013 – and we Germans are working hard to do just that.
FT: But how great is the danger of excessive exchange rate competition, especially in the light of the latest quantitative easing by the US Federal Reserve Bank?
AM: The G20 has repeatedly stressed that the crisis can only be overcome if we dismantle all forms of obstruction, and do not erect new ones. And one can see that there are some developments which we must discuss seriously.
Take world trade: the signal should be given by Seoul that we are sounding the bell for the last phase of negotiations to complete the Doha round (of trade talks). We have been talking about it for many years, but there is another chance in 2011 to complete it at last.
Unfortunately, trade barriers are being erected again on many sides, through customs duties and sometimes through preferences for domestic producers in public contracts. We must avoid actions like that, and talk about them very openly.
Besides, exchange rates should reflect the real economic strength of a country. I don’t think it’s sensible to have a political argument about it. Rather, particularly considering the debate about China, we must find facts and benchmarks in order to deduce what is a fair exchange rate.
Finally, we must also talk more in the G20 framework about the exit strategy from our various crisis programmes. We must switch to a phase of budget consolidation, as we are doing in Germany and other European countries in 2011, in order to get to a lasting and sensible development of the world economy.
FT: But aren’t the Americans trying to avoid an open currency war with the Chinese by calling for binding targets for balance of payments deficits and surpluses. Is that not sensible?
AM: I don’t think much of these quantified balance of payments targets. It is not just a question of exchange rates, but also a question of competitiveness. And the competitiveness of countries depends on many more indicators than just weighing up imports against exports. So from a German perspective it is far too narrowly focussed just to pick a figure of 4 per cent (of gross domestic product for surpluses and deficits) and nothing else.
Every country has to carry out its own economic reforms. In Germany, we have made great efforts in recent years. But now simply to concentrate on the extent of trade surpluses I consider, as I said, much too narrowly focussed, because it disregards all the underlying structures.
By the way, you can’t look at Germany in isolation, but as part of the eurozone, with a common currency and a common market.
FT: But you have just said that we must struggle to achieve sustainable growth. Are you not afraid of a return to the depression of the 1930s?
AM: I am not afraid of that for Germany, and if I consider the forecasts of the International Monetary Fund, I am not for the world economy, either. One cause of the crisis was that we had no sustainable growth, but rather in many countries growth was based on debt and speculative bubbles. In contrast to that, I now see the world in some regions is back on a very sensible growth path. The greatest danger that threatens us is protectionism, and we are still not taking adequate steps to ensure a genuinely free trade.
Back in the 1930s it was just protectionism that ruined many efforts to get growth going again. So, there is something we can do that does not cost us much, and does not create any new debts, and that is to finish the Doha round. That is the priority for me.
FT: Before the Toronto G20 summit you stressed strongly how we needed to have stricter financial regulation to deal with the crisis. You will approve the Basel III accord on bank capitalisation in Seoul, but not much more. How do you plan to control banks that are “too big to fail”?
AM: It took more than 10 years to negotiate the Basel II agreement. Basel III has been achieved, with much stricter standards, in less than two years. It’s wonderful that it succeeded! And if it is now put into effect everywhere, we will have created a real crisis prevention mechanism. In the run-up to this G20 summit, we have also agreed on the most comprehensive reorganisation ever of the IMF. Without the pressure of the G20 meeting, without the pressure of the heads of government arriving shortly, the finance ministers would probably not have managed to do it. The new IMF structure reflects the power relationships in today’s world much better. So here too, the community of states has pulled itself together.
There are more successes, too: in the US a remarkable package of financial regulations has been agreed, and we in Europe have created a new financial market supervision. On top of that, we have finalised rules for hedge funds in the EU. We are on the right track with derivatives and clearing houses, both in Europe and America. So a lot more has been achieved than you suggest.
What is still not satisfactorily resolved is indeed the problem of systemically important banks, those ones described as “too big to fail”. The recommendations of the Financial Stability Board are known, but it is clear that there are different approaches within the board itself. That remains an important task for 2011. The aim is to introduce rules so that in crisis situations we can better restructure or wind up systemically-relevant banks. It is a question of these working across borders and with the least possible risk of loss for the taxpayer. At the same time, it is important that the winding up of a systemically-relevant bank should not affect the stability of the financial system.
Germany itself and also the EU are already a step further on with restructuring proposals. I will raise the problem again in Seoul to convince my colleagues that we must urgently find a solution.
FT: Can we come back to the question of imbalances? There is an imbalance in the world economy, and also within the eurozone. People say that the German government is insisting on savings, and stressing stability but not growth. But I want to know, how will Spain and Greece get back to sustainable growth?
AM: I do not see any contradiction between growth and stability. We have already seen the allergic reaction in the markets to countries that combined excessive debts with inadequate competitiveness. Both played a role. So the solution to the problem must address both issues: these countries need on the one hand a better stability culture, and on the other, structural reforms.
That is why I insisted so much when it came to helping Greece that it was not just a question of aid, but also that everything should everything should be staked on making the structural changes needed to promote growth. Spain has reformed its labour market. Greece is making similar efforts. We must align as much as possible the very different standards of competitiveness in Europe, and by that I certainly do not mean that we should all aim for the happy medium. If Europe is going to remain a powerful, innovative and creative continent, we must focus in all areas on the best performance. We must not allow the weakest to set the pace in Europe.
And one more thing: Germany has got a level of public debt of more than 60 per cent of gross domestic product, so it is clearly above the criteria of the Maastricht treaty. We have an ageing population. If we want to preserve our social state and our social market economy which have proved themselves for many decades, then we cannot allow any further accumulation of debt. This level of debt does not leave any room for investment.
In our federal budget we are allocating 55 per cent this year for social spending. If you add the wages of employees in public services, plus interest payments, then that amounts to 75 per cent of the budget. But we must invest more in the future of Germany, and we must not in any circumstances – considering the changed age structure of the population – take on more new debt on such a scale.
The average age of the German population will rise from 35 in 1990 to 48 in 2030. At the moment it is 42. Most other industrial states have no comparable change in the age structure. We must tackle that problem if we are not going to fall behind in the future.
FT: But in the Maastricht treaty the emphasis was put entirely on stability and budget deficits, and not on competitiveness and the balance of payments …
AM: Not enough attention was paid at that time, in the stability and growth pact, to the them of competitiveness. That is why in the latest Franco-German proposals we talk frequently of stronger economic co-ordination, or even an economic government.
From the eurozone crisis we have learned that we must change the definition of breaches of the stability and growth pact. Until now we only focussed on the 3 per cent ceiling on budget deficits. In the future we will also impose sanctions if a member state has more than 60 per cent of its gross domestic product in public debt and makes no efforts to reduce that level of borrowing. And also, if certain macro-economic benchmarks are not fulfilled, we intend to have sanctions.
For example, wages in the eurozone in the last 10 years increased at very different rates, as Mr Trichet, president of the ECB, is always reminding us. There are countries where wages rose by more than 100 per cent in the past 10 years. In Germany they only increased by 17 per cent, and the average was about 39 per cent. So we must make efforts to bring these performance indicators closer to each other, and not let them drift further apart.
FT: Can we talk more about EU sanctions? I wonder how anyone can suggest suspending voting rights? It sounds like a torture chamber for member states.
AM: The Lisbon Treaty provides in Article 7 for the suspension of voting rights in situations where the fundamental values of the European Union are violated. So in general we are thinking of offences against human rights.
Now we have learned that when a country does not keep to the fundamental requirements of currency stability over a prolonged period, it can endanger the euro as a whole, and really tip our currency union into an abyss. That was precisely our experience this spring.
If in the long term a country constitutes such a severe danger for all the others, then I think it is justified to consider whether that country should not be allowed to vote. The heads of state and government discussed the question in Brussels, whether such a member state should no be allowed to vote, for example on all questions concerning economic and monetary union. I think that is a measure that needs to be discussed. Besides, everyone can avoid it by observing the fundamental stability values of the eurozone.
FT: But it is perhaps not practical to try to get such an important treaty change.
AM: It is true that such a treaty change has something to do with the transfer of competences and therefore would require very thorough debate. So we will not decide on it quickly.
I said in the Bundestag with the greatest conviction: “If the euro fails, then Europe will fail!” This is a question of very fundamental values. So suspension of voting rights will not be part of a limited treaty change, but the issue will not be taken off the future agenda.
FT: If I understand you correctly, Madam Chancellor, are you saying that the eurozone will survive, but the number of eurozone members could actually be reduced, under certain circumstances?
AM: On the contrary. I assume that the number of member states of the euro will rise in the coming years. And I welcome that. It is good that for example a country like Estonia will be a member of the eurozone. In the discussion about a stability culture, Germany has always got a great deal of encouragement from central and east European countries, because there is pronounced understanding for the concept there. If these countries join the euro they will bring a solid understanding of stability. Countries that want to enter the eurozone and fulfil all the criteria are very welcome.
FT: Well, you know the state of German public opinion very well about the membership of the eurozone. Could we perhaps talk about the next head of the European Central Bank?
AM: There is not much to say about it.
FT: I would like to ask if the next president must definitely be a German.
AM: There is not much to say, because no decisions have been taken. The only thing I know is that Jean-Claude Trichet, the ECB president, is leaving office in autumn next year. I can raise your hopes that before then a successor will be found.
FT: But I am not suggesting any name. I am only speaking about a German candidate. Must that person be a German, because of public opinion in this country?
AM: Let me repeat: there has been no decision, nor any preliminary decision.
FT: Can we at least agree that it will be a question of competence?
AM: It will be based on performance and competence. Naturally.
FT: So is it’s a question of competence, regardless of nationality?
AM: We will find a personality who will be a worthy successor to Jean-Claude Trichet.
FT: I would like to turn to another city, and that is Karlsruhe. This whole story in Brussels, and why you insisted on a treaty change, is all about the constitutional court in Karlsruhe, isn’t it?
AM: My attitude is determined as much by my European conviction as it is by constitutional concerns. If we were to face case such as Greece after 2013 – something I hope will not happen – then we must not face the same emergency. I’m afraid that when the Lisbon treaty was negotiated, the possibility of the stability of the eurozone as a whole being endangered was not taken into account. So we need, along with the maintenance of Article 125 – which says that one country cannot be responsible for the debts of the others – a legal provision for a situation where the stability of the euro as a whole is threatened. The answer is to have a crisis resolution mechanism which in our view must also involve private creditors.
FT: That is hard to agree on, and you have very little time.
AM: That is why we must work very hard on it.
FT: But do you need some sort of pool of liquidity? At the moment you have this European Financial Stability Fund with a bit pot of money. Do you need to keep this money, in order to provide liquidity in an emergency?
AM: Let me put if very clearly: I see the need for an intergovernmental instrument with the participation of private creditors, i.e. those people who have already earned good returns from a country in difficulties. As for the manner in which it can be arranged, that is what we have got to sort out.
FT: Should the IMF be involved?
AM: In the conclusions of the European Council, we mentioned the role of the IMF. But there too the details have yet to be decided. In any case, the IMF does possess a great deal of competence in such matters.
FT: Your agreement in Deauville with Mr Sarkozy caused a big stir amongst other member states, including amongst your friends. The Finns and the Dutch were upset. Is it not too narrowly focussed to insist always on the Franco-German relationship, isn’t that out of date in an enlarged EU?
AM: We should and we will always speak with the largest possible number, indeed with all member states, that’s true. But nevertheless it’s also true that if Germany and France go to a council meeting with completely differing views, if Germany for example wants a treaty change, and France is against it, then the failure of the summit is virtually certain. Agreement between Germany and France is therefore a necessary, but not a sufficient condition for a successful summit.
The agreement in Deauville undoubtedly helped, because it gave the signal that both countries were agreed on a limited treaty change. On that basis we tried to convince our othr partners, and in the EU as a whole, to reach a common position.
FT: On domestic policy: You always wanted a centre-right coalition, but you have had a very difficult first year in office. What really went wrong?
AM: Initially for sure we were too preoccupied with ourselves in the coalition, but this period is now over and the results we’ve produced speak for our Christian Democrat-liberal government. Take our energy plan, the health reform, the comprehensive budget consolidation, and the changes in the benefit rules for the long-term unemployed. That is all correct, and does the country good, but it was only possible with this Christian-liberal government.
FT: My impression is that you have changed your own style a bit …
AM: How one works depends on the situation. This autumn it was necessary to take some controversial decisions. We fought the election with these policies, and we were elected on that basis, and now we are putting them into effect.
FT: We have got an economic upturn, but your ratings in the opinion polls have seen no upturn. Isn’t that a bit of a pity?
AM: Many people will be convinced when our decisions start to take effect. Whoever bases policy only on short-term polling trends is in the wrong job.
FT: Is a black-green coalition between your Christian Democratic Union and the Greens a possibility?
AM: We have that in Hamburg and in Saarland. Otherwise the differences between the Union and the Greens are very wide.
FT: What about in Berlin?
AM: I am happy that we can take important decisions in our Christian-liberal coalition, because the agreement between the Union and the FDP is broader than in any other combination. As I said, there are a great many differences between the Christian Democrats and the Greens.
The interview was conducted by Lionel Barber, FT editor, Quentin Peel, chief correspondent in Germany, and Gerrit Wiesmann, Berlin correspondent.
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