© REUTERS/Leonhard Foeger

How would you put the FAZ letter signed by 154 German economists into context? What does this letter signify? We have three camps in Germany by now when it comes to Europe. We have those who have a very anti-European ordoliberal, neoliberal view. You have a second camp with politically left-wing, very Keynesian, occasionally extreme views demanding a true European republic. And then you have those who are more pragmatic and less dogmatic (I would put myself in that camp).
The call by the 154 economists is a very strong euroskeptic message that basically rejects any progress on integration—and even worse, I believe, it is actually calling for an unwinding of some integration measures, for example by making it possible to exit the euro. But if you do that you’re creating something that’s akin to a fixed exchange rate system where members can leave at a whim. If that happens, markets will react and speculate against this or that country.
I’m concerned about the letter, not only because I feel the proposals are wrong-headed, but also because of the crisis it can lead to. Take Italy, where the political situation is extremely uncertain and euroskepticism is gaining ground. To demand, in such a situation, that we should be tough on Italy and force them from one day to the next to reduce debt and repay loans is to run an incredibly high risk of triggering a crisis. That’s not good economic policy; rather, it exemplifies a nationalist view on Europe that’s potentially damaging.

How influential are these economists? They are a minority even in the ordoliberal camp that had its heyday perhaps 20 years ago. And if you look at the demographics of this group it’s male-dominated, older, with a traditional outlook that lacks a European perspective. The right-wing populist Alternative für Deuschland (AfD) immediately said, “Finally a group that’s confirming and supporting what we’ve been saying”’ I don’t really want to comment on that, but it does say a lot. In short, this group is certainly not representative of German economists. It’s not even representative of German euroskeptics.

The letter warns again a “Haftungsunion” (liability union) and a “Transferunion” (transfer union), the latter implying that Germany is paying too much for Europe. Isn’t that a widely-held perception? First, Germans are very pro-European, young Germans in particular. You see that in every survey. And Germans on average understand the need for more integration, more so than people in central and eastern Europe or southern Europe. That’s an encouraging signal. Second, some people are stoking fear by saying, “All the other Europeans want is our German money.” Haftungsunion is a manipulation aimed at scaring people. It’s triggering the sentiment that we are the paymaster of Europe, that everyone else is misbehaving and all they is our money. And that’s just not the case.
If you look at the last ten years, what has Germany actually paid for? Germany has given loans. The ESM (European Stability Mechanism) has lent money to Greece, to the Greek government. What has Greece done with that money? To a large extent they have repaid their credits with German and French banks; in other words, they have protected German taxpayers. You can now complain that German banks shouldn’t have been bailed out—and I would agree with that completely—but it’s not correct to say German taxpayer money has been transferred to Greek taxpayers who are lazing on the beach, living off German money. That’s the impression a lot of people get when they read these texts but it’s simply wrong.
The third point I wanted to make is on the Haftungsunion, which one perhaps can translate as liability or insurance union. It’s about sharing risks; that’s the whole idea of Europe, the whole intention of integration. Everyone benefits from an insurance union. Take health insurance. Of course people who are healthy, who live well, who exercise regularly, eat well, and are lucky enough to be less exposed to genetic illnesses will contribute more than they will receive in benefits. Others who may have bad luck because of an accident, or because they are more exposed to specific risks, will get more money out than they pay in. So should we not have health insurance because some people benefit more than others? Of course not. Everyone benefits from it. Even if I’m the healthy one, I’m happy to pay more money knowing that I will be taken care of if I fall ill. That’s also the whole idea of Europe: risk- sharing means all of us are better off, so Haftungsunion is not a bad thing. It’s actually what Europe is about.

Yet in the run-up to the next European summit in June, this seems to be the only issue making a big splash; there’s no other real debate in Germany. Do you share that impression?  We need to have more of a debate, I agree. In January, I was one of 14 French and German economists co-writing a paper about which European and monetary union reforms are needed to balance interests and make progress. And to be honest, if the FAZ letter is the best the euroskeptics and the nationalists can come up with, then I’m not worried. If that’s the best shot they have, I think we’ll be in good shape in Germany to do the right thing, namely to have a sensible reform of monetary union.

Does that mean that you’re quite optimistic for the upcoming European summit in June? I don’t think the June summit will see a breakthrough. I think it’ll be a starting point for the French and German governments to get together and to work over the next half year to really put in place sensible reforms of monetary union, and of the EU as a whole. There is a sense of urgency if you look at Italy or at Brexit. There’s a window of opportunity now, before the European elections next spring. It’s the right time to do it. Europe is doing well economically, so now really is the time.
That’s why I’m not too optimistic for the June summit, by the way: the economy is doing too well. People don’t understand why we should undertake tough reforms now, at a time when Europe is recovering. And my answer is precisely because we’re living in relatively good times. You fix the roof when the sun is shining; you don’t repair it once it starts raining. Then it’s too late and the damage is done. But I hope and think that the German and French governments are well aware of that and that they will have made progress by the end of this year.

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© REUTERS/Alessandro Bianchi

Italy is in crisis. For a country that has seen more than 40 governments since the end of World War II, that may be not an entirely unusual state of affairs. But ever since Prime Minister Matteo Renzi’s big gamble failed when he lost a referendum on constitutional reform on December 4 with a 40-60 margin and resigned, questions about the eurozone’s third largest, if sluggish, economy and its brewing banking sector crisis have returned with a vengeance. The “no” vote has also created a vacuum within yet another influential EU member states. With upcoming elections in the Netherlands, France, and Germany, the EU already had limited capacity to act in 2017 – now Italy has added itself to the list.

Italian President Sergio Mattarella acted swiftly. He entrusted Renzi’s foreign minister Paolo Gentiloni with forming a caretaker government, which will use the existing center-left coalition in the parliament and lead the country until the next elections – at the latest in February 2018, but very likely sooner. The populist Five Star Movement and the right-wing Lega Nord (Northern League) have already called for snap elections – the former hoping to take advantage of Renzi’s crushing defeat and Italians’ general anger with the political class, as the party is polling head-to-head with Renzi’s Democratic Party. The latter also seems to favor a quick return to the ballot box. As a “political animal,” Renzi has not yet lost his appetite for the game: he we will quickly push for a new political mandate.

Still, Italy’s fellow eurozone member states seem to have undervalued the risks political uncertainty poses for the stability of the common currency. Frequent calls to reform the eurozone’s structure have been followed by little in the way in action; thus, the euro remains vulnerable to turbulence in the financial markets. It is true that the markets seemed to have expected a “no” in the constitutional referendum and have shrugged of the vote for the most part; however, a faltering economy, the second highest public debt ratio in the EU (at 133 percent of GDP), and the troubled banking sector point to big danger ahead, irrespective of who wins the next elections.

Key Problem: Italy’s Banks

The Italian banks constitute a key problem, as their bad loans amount to circa €360 billion in total. Italy’s third largest bank, Monte dei Paschi di Siena, is the biggest worry. Last summer the bank failed in a Europe-wide stress test undertaken by the European Central Bank, and is now obliged to address its capital gap. By the end of the year, the bank is required to increase its capital by raising up to €5 billion. After the referendum, the bank submitted a request for more time, which the ECB rejected – signaling that the financial environment is deteriorating. If this process fails due to political uncertainty, there is a risk the bank could collapse, which would undermine confidence in other Italian and European banks. The interim government would be forced to either step in and bail out Monte dei Paschi, which would mean involving the 60,000 bank savers in restructuring its costs, or asking the eurozone for help. The winner would be the Five Star Movement and other populist, anti-EU forces – either because of the loss of the savings of thousands of Italians, or because of the strict conditionality that would accompany a European rescue package.

An Italian banking crisis would confront the EU with a two-fold problem: First, a controversial theme would be back on the agenda. In the Dutch, French, and German elections, it would be difficult to convince these electorates of the necessity of saving Italian banks. Second, it is far from certain that the eurozone could maintain strict conditionality in the case of a member state as central as Italy.

Meanwhile, the debate on the legitimacy of the Italian electoral law, the so-called Italicum, is a decisive factor determining when the next elections will be held. At the moment, Italy has no single electoral law governing both chambers; the one in place was designed assuming a “yes” in the referendum and thus only applies to the lower house of parliament. The ruling by the constitutional court is pending and not expected before early 2017, but it will likely reject the current law, in which case the Gentiloni government will have to sketch out a new electoral law first and win parliamentary allies to get it passed – probably Forza Italia, the center-right party of former Prime Minister Silvio Berlusconi. It will likely result in a more proportional representation system (until the proposed reforms, the system gave bigger parties an edge). This would then likely reduce the chances that the Five Star Movement, which openly flirts with a referendum on euro membership, would come to power.

But as the heated atmosphere during the referendum campaign has shown, arriving at this point will prove tricky – and possibly unreachable should Italy’s banks go under while Italy’s policy-makers quibble.

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© REUTERS/Alkis Konstantinidis

When Alexis Tsipras burst into the spotlight in early 2015, he was seen by most in Europe as too young, too radical, and too left. At just 40, he was fresh-faced and irreverent, and already head of Greece’s Syriza party – a motley crew of radical left-wing groups, from ecologists to Trotskyists.

Across Europe, the prospect of a Tsipras win raised the specter of chaos in Athens and a Grexit, with a domino effect in Spain, Portugal, and Italy looming on the horizon. An earlier article in Germany’s Der Spiegel had included Tsipras in a list of the twenty most dangerous politicians for Europe’s unity, along with France’s far-right Marine Le Pen and Italy’s flamboyant Silvio Berlusconi.

But most Greek voters didn’t agree. They saw Tsipras as the only hope to bring Greece out of its deep misery. He vowed to end austerity, stop further budget cuts, and lift the economy back on its feet. So they gave Tsipras the mandate he needed and Syriza swept to power in January 2015.

Nearly two years later, Tsipras hasn’t delivered on those promises. Instead, he and his government (including his coalition partners, the far-right Independent Greeks, or ANEL) are considered German Chancellor Angela Merkel’s darlings. It’s certainly been an abrupt about-face from the prime minister’s “Go back, Mrs. Merkel” speech on the campaign path to his cozy ties with Berlin today.

A Disappointing Record

Once in office, Tsipras compromised with Greece’s lenders and expanded upon the previous governments’ austerity policies. He privatized public assets, slashed pensions for the sixteenth time, and lifted a state-imposed ban on foreclosing family homes.

But those measures haven’t seemed to have much impact on the ailing economy. Unemployment is gradually falling, but almost a quarter of the population is still out of work. Highly-skilled young Greeks are migrating to Western Europe to find jobs, while businesses are either shutting down or fleeing to nearby Balkan countries with more attractive tax rates. State debt is at a record 179 percent of Greece’s GDP.

Tsipras never managed to win consensus for his austerity plans either. Greeks haven’t taken to the streets en masse, but disillusionment with the government is growing and Tsipras’ popularity plummeting.

According to an October poll by the Athens-based survey group Greek Public Issue, only 14 percent of Greeks would vote for the current union government. Less than a quarter of voters see Tsipras as the best possible prime minister among the country’s leading lawmakers.

Tsipras was dealt yet another blow in late October when Greece’s highest court struck down a new television licensing law. The government had championed the legislation as a way to crack down on Greek oligarchs owning television stations and broadcasting without licenses for nearly thirty years. Syriza claimed these media moguls were influencing elections. But critics argued the law was merely Syriza’s attempt to create its own group of media moguls.

And the prime minister’s cabinet reshuffle in early November has come under heavy criticism as well – his newly appointed ministers will only have three weeks to negotiate with the country’s lenders on important issues like privatizations, a new minimum wage, and collective redundancies.

Now, pressure is mounting and the prospect of early elections or a reshuffling of the government is looking ever more likely. Tsipras, however, continues to bat down the possibility. “We’ll have elections in autumn 2019. The people will judge [us] then, freely and unaffected,” he told a group of European reporters last month.

Voters seem to have a different opinion. An overwhelming majority – 85 percent in Public Issue’s latest poll – doesn’t agree with the government’s economic policies and 45 percent believe that neither of the two largest parties can lead the country out of crisis.

An Uphill Battle

From any angle, Tsipras is facing an uphill battle and it’s unclear if he’ll be able to turn around his fortunes. What’s more, a new round of taxes will go into effect in 2017. Everything from landlines and cellphones to heating oil will carry an additional tax. The effect on industry has already been startling. Tens of thousands of small and medium-sized businesses either shut down or moved to Bulgaria, where the corporate tax rate is a stable ten percent. That is a far cry from the sixty percent in taxes and social security contributions they face in Greece.

The country’s international lenders haven’t lightened the load, refusing to even discuss a debt write-off. The IMF has now acknowledged it made mistakes in its handling of the eurozone crisis, particularly in pushing Greece to follow certain austerity policies. According to an IMF report published last summer, the fund says it should have recognized the Greek economy’s deep dysfunction and pushed for debt restructuring far earlier.

In fact, Greece had been building an inflated economy on shaky foundations over four decades. The two ruling parties, PASOK and New Democracy, allowed a system of patronage to flourish in public and private sectors. Politicians promised jobs to their constituents in exchange for votes. Bribes were the norm for doing business with the government, and they often came from abroad. German companies were also involved.

Meanwhile, Athens kept borrowing to fund its growth while globalization was crippling the country’s manufacturing sector. When the housing bubble burst in the United States in 2008, it was as if a tsunami swept over Greece, drowning the country in its own debt. The sociopolitical landscape in Greece changed swiftly. Systematic cronyism fell apart: As part of the EU-IMF bailout agreement, hiring in the public sector was frozen.

A Blessing in Disguise?

With hindsight, Syriza might have been a blessing in disguise to Greece’s pro-austerity camp. The party can be credited with implementing tough austerity measures that previous governments couldn’t manage – the very same measures that spurred hundreds of thousands of people to take to the streets in 2010 and continue protesting all the way through 2015.
During those demonstrations, Syriza ended up absorbing most of Greece’s union leaders, grassroots movements, and historic left-wing figures. Along came dozens of former PASOK members who were scrambling to save their political future.

As prime minister, Tsipras has managed to tame his party and close ranks. He swept out Syriza’s far-left elements and kept only those that were true to him and his close circle of influence. Those who were forced out now hold Tsipras responsible for ruining the Greek left’s only real chance to steer the country’s politics. Historically, Greece’s left has only had limited political influence, if any.
Meanwhile, Tsipras and the party have undergone significant change, as was evident at the Syriza party convention last October. Athens was covered in banners proudly featuring Tsipras’ face. Some 2800 loyal party members showed up at the convention and clapped throughout the prime minister’s speech, backing all his policies with almost religious fervor.

Praying for an Obama Miracle

With Greek debt ballooning, Tsipras is desperately looking for EU partners to ensure his political survival. But he still hasn’t managed to build a coalition with Italy, Spain, and Portugal to oppose German-driven austerity in Europe.

So the government is now banking on US President Barack Obama’s visit in mid-November to help convince Greece’s lenders to write off some of the country’s colossal debt. Greek media are buzzing with hopes of a miracle from Obama – he has been the only Western leader speaking out against austerity. The US president will push the IMF and EU leaders to ease Greece’s debt load, they daydream. That would certainly help the prime minister pick up some points with his electorate.

Still, it might be too little too late for Tsipras. In a press conference back in 2015, he declared he would only start putting on a tie if he managed to come to an agreement with the country’s creditors and secure a debt write-off. He has stuck to the promise and never worn a tie.

But even if he does succeed in relieving Greece’s debt burden, he should be careful not to get too comfortable in his new clothes. Because the tie may come to symbolize just how much he has compromised – and that could spell political doom.

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© REUTERS/Yves Herman

Even if the British vote to leave the EU on June 23 – rendering the decision void – the thinking behind the recent EU reform deal will not be forgotten.

The least significant change concerns welfare benefits. Cameron won both an “emergency brake”, allowing a government to limit in-work benefits for EU migrants, and new rules on payments to migrants’ children living in other member-states. To justify these innovations, the decision extends recent jurisprudence from the European Court of Justice, which had curtailed access to unemployed migrants to benefits; it implies that the right to free movement within the EU does not mean free access to the welfare systems of host countries. The text says that benefits may be limited if high immigration puts pressure on social security systems, labor markets, or public services. In the event of Brexit, such limitations on benefits are likely to continue, since they suit many member-states.

Two other changes are more interesting. The section on sovereignty enhances the special status already enjoyed by Britain. The UK has opt-outs from the Schengen agreement and the euro. It chooses whether to join justice and home affairs measures (and in 2014 withdrew from most of the ones it had previously signed up to). A protocol of the Lisbon treaty insulates Britain from the effects of the Charter of Fundamental Rights. And February’s decision promises a treaty change to state that “the UK…is not committed to further political integration into the EU…The references to ever closer union do not apply to the UK.”

But this section affects all the member-states. It says that that ever closer union cannot be used to extend the powers of the EU, or to prevent powers being handed back to member-states. “The references to ever closer union among the peoples are therefore compatible with different paths of integration being available for different member-states and do not compel all member-states to aim for a common destination.”

These words merely describe reality; the various members have long had very different ideas of where they want the EU to go. But the text infuriates true believers in a federal EU. Andrew Duff, a former British MEP, responded: “For the rest of the EU, the decision means the end of an implied common goal. Suddenly it has become acceptable if not respectable for states to hold different concepts of the finalité politique…The EU is left with its first concrete instance of political disintegration entrenched at a constitutional level.” But however the British vote, the principles enshrined in the decision will surely endure; few European leaders are Duffian federalists.

The Euro Countries and the Rest

The other key section covers relations between euro countries and the rest. The British worry that the eurozone may caucus and push through rules that damage the single market in financial services or the City of London. The euro countries are concerned that the British may try to veto financial regulation – or somehow seek to block eurozone integration. The decision defines some sensible principles to govern relations between euro and non-euro countries:

First, discrimination based on a member’s currency is prohibited. Laws concerning the eurozone “shall respect the internal market [and] the competences, rights and obligations of member-states whose currency is not the euro.” Second, members outside the euro “shall not impede the implementation of legal acts directly linked to the functioning of the euro area and shall refrain from measures which could jeopardize the attainment of the objectives of economic and monetary union.”

Third, countries outside the euro will not have to contribute to eurozone bail-outs. Fourth, the Eurogroup (informal meetings of ministers from euro countries) should not intrude on the role of the Council, where the governments co-ordinate economic policy and take decisions, including for the eurozone.

These principles are not particularly controversial (though Sylvie Goulard, a French MEP, found them “seriously imbalanced to the detriment of the eurozone”). They will go into the treaties if the British vote to remain – and the treaties will then recognize, for the first time, that there are two sets of members, euro and non-euro. Even if the British leave, many governments will want to preserve these ground rules for relations between euro-ins and euro-outs.

One part of this section was bitterly fought over. The British wanted the right to have financial regulations that differed from those of the eurozone. The French, backed by Germany, many eurozone governments, and the European Central Bank, feared that such differentiation could lead to laxly-regulated UK firms undercutting continental ones, or to financial instability.

An early version of the decision pleased the British by saying that “different sets of Union rules may have to be adopted in secondary law.” The French claimed that the wily Sir Jon Cunliffe, a deputy governor of the Bank of England and a former permanent representative to the EU, had “got at” the Danish and Polish officials drafting the text; since their countries were outside the euro, they (according to the French narrative) had an imperfect understanding of the issues at stake.

The wording of the final compromise maintains the status quo, leaving open for future battles the degree to which UK regulation may diverge from that of the eurozone. The text says that all financial institutions must apply the single rule book. Laws applied by the ECB, the Single Resolution Board or other EU bodies “may need to be conceived in a more uniform manner than corresponding rules to be applied by national authorities” of countries outside the banking union. “To this end, specific provisions within the single rulebook and other relevant instruments may be necessary, while preserving the level playing field and contributing to financial stability.” The text also says that unless member-states choose to join common mechanisms, they are responsible for implementing their own measures on supervision, resolution and macro-prudential stability.

Cameron also won a second “emergency brake”: a country outside the banking union may pull the brake if it believes the above-mentioned principles have been breached. The Council and EU institutions would then seek to resolve the matter within a “reasonable time”. The European Council may be convened, but the brake is not a veto, and ultimately the Council would decide the issue by majority vote.

No Dangerous Precedent

Some federalists fear that Cameron’s renegotiation establishes a dangerous precedent. “By transforming the right of a state to leave the EU into the right to blackmail partners with the threat of leaving, Cameron has opened Pandora’s box,” wrote Goulard. She worries that other members will now try to pick and choose the bits of the EU they like. Such fears are probably exaggerated. Most other countries enjoy much less leverage than the UK; according to one EU official, “if Hungary held a referendum and threatened to leave, many people would not be that bothered.”

In any case, the specifics of Cameron’s deal contain much good sense. They recognize the reality that in an EU of 28 plus countries, more differentiated – and complicated – structures will be needed to hold the Union together and enable the very different preferences of the member-states to be reconciled. Federalists do their cause no credit by clinging to conservative and traditional ideas of uniformity.

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REUTERS/Yves Herman

It was January 2015. The radical left alliance Syriza had won the Greek parliamentary elections. The assembly of Eurocommunists, Trotskyists, Maoists, and other leftwing splinter groups had led the charge against austerity policies and the Troika since the start of the crisis, and now it had gained power. Syriza formed the first Greek left-wing government, and became the first anti-austerity party to lead a eurozone country. “Greece is progressing, Europe is changing,” party leader Alexis Tsipras told cheering crowds. …

Read the complete article in the Berlin Policy Journal App – January/February 2016 issue.

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Artwork: Dominik Herrmann

Yet on a sunny morning in late July 2012, its chandeliered splendor was not the backdrop to a speech supporting British business. Instead, Mario Draghi, president of the European Central Bank, came to shore up the euro. In dramatic, even brilliant, style, he succeeded. The steps he outlined, however, and the many repercussions of the actions that they called for, opened up a string of questions about the role of the ECB in helping to complete what is still only the half-finished construction of economic and monetary union in Europe.

Draghi, a former senior official at the Italian Treasury and head of the nation’s central bank, the Banca d’Italia, took over from French monetary technocrat Jean-Claude Trichet in November 2011. He immediately stamped his mark on the central bank with his own combination of pragmatism, determination, and dry humor. The ECB boss is less ceremonial and more precise than Trichet, more attuned to the financial markets, and has strong links to the United States (he studied at the prestigious Massachusetts Institute of Technology and worked for a while as managing director at Goldman Sachs). Draghi combines a wry turn of phrase and a penchant for intrigue (which some say stems from his Jesuit upbringing) with an impressive set of responsibilities, some of which are mutually contradictory. Several of these characteristics were on show in his London address.

Draghi opened his short speech with a joke, comparing the euro to a bumblebee. “This is a mystery of nature because it shouldn’t fly but instead it does.” But he had a serious message: At the height of international capital market gloom concerning the fate of the single currency, speculators had been selling the euro and dumping bonds from countries like Italy and Spain. The central bank president thought anti-euro action had gone too far, and said so: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” His words echoed around the world, propelling sharply higher bond prices for the countries that had previously been under attack and winning some essential breathing space for the single currency.

…

Read the complete article in the Berlin Policy Journal App – September/October 2015 issue.

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Artwork: Dominik Herrmann

The EU – specifically the eurozone – seems to resemble a group of mountain hikers in the path of an oncoming storm. Should they try to climb to the next shelter? Or head back to base camp? The entire group has to hang in there and make it to the next shelter!

Should a smaller, “pioneering” group explore the way first? No, all members must stay together and depart immediately. Otherwise each will respectively face greater danger. There is no other possibility but for the whole group to reach the next shelter as quickly as possible. They do, however, face an additional difficulty: only a few, to continue our metaphor, are really familiar with the weather report and are unable to communicate the severity of the weather warning to the rest of the group.

… meaning the EU is facing the greatest storm since World War II – but this isn’t being openly communicated? Exactly. Communication within the group is already difficult enough but to get information to home base in order to receive support is even more challenging. They would have to provide clear answers to a few questions: What position are we in? Where are the threats coming from? What has to be done so we do not leave anyone behind?

And where does this path lead? The question is: what kind of shelter do we need in order for all of us to be safe? Both the European Union and the eurozone need reforms to develop the necessary capacities to address our pressing problems and challenges.

Europe has become the destination of choice for hundreds of thousands of refugees and migrants from Africa and the Middle East. The problem is too big to be ignored and cannot be solved on the national level. Therefore we need suitable European instruments to respond to this new situation. We must develop a common European refugee policy. We are talking about the very essence of European solidarity – if we fail here, Europe risks to fall apart.

…

Read the complete article in the Berlin Policy Journal App – September/October 2015 issue.

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© REUTERS/Alkis Konstantinidis

You can read about the European Union’s horrible setback anywhere. At fault is the obstinate and callous austerity policy of Angela Merkel and especially Wolfgang Schäuble. The EU has deteriorated from a warm community of peace and prosperity to the cold detachment of an accountant’s office. One editor-in-chief described the chancellor, in a southern German daily, saying, “Merkel is a phenomenon. Without any apparent talent, she has managed to get far in life by doing nothing at precisely the right moment.” That is clearly nonsense –recall the sheer number of German and EU decisions she has negotiated or imposed since the beginning of the financial crisis. Certainly, one can disagree with her, but one cannot fairly accuse her of inactivity.

Why is this prejudice so persistent? It is likely Merkel’s deliberate and inconspicuous political maneuvering that is so provocative. In fact, the criticism isn’t really directed at Merkel personally. Rather, its target seems to be the complexity and general dullness of political events. Endless summit meetings, always in the routine Brussels setting, with the same morose journalist reporting endless negotiation, bargaining, and further negotiation – the inevitable impression being that a lot of energy has produced very little. It goes without saying that EU politics are especially unattractive.

The giant consensus machine that is the EU is clearly not immune to individual states with a predilection for breaking rules. And that appears to be a strike against the EU. For six months two Greek politicians harangued the rest of Europe, forcing many busy politicians to take part in incessant meetings on the same problem. On the one side, the Goliath EU – and on the other, the tiny Greek David. Naturally, the giant failed to leave a good impression.

That is not an entirely incorrect summary, yet impertinence didn’t quite win outright either. With a surprising and steadfast patience, the EU displayed its greatest strength. From a historical perspective, it is not that long ago that a conflict like the one that pulled Greece out of line would have exposed serious faults and forced nations into bilateral alliances against one another, into military skirmishes, and perhaps even into war. There was not one moment in the past six months where anything of that nature was at stake. The Greek attempt to mix up the EU shattered on the stability of EU institutions. Never did it come to bilateral alliances; the EU remained a unified front. There was no recourse to archaic, 19th-century acts. And not only the governments, but also the peoples of Europe were unconvinced. They did not rise up against Greece’s hubris, but at least accepted (albeit unenthusiastically) the patience of their leaders. Here is the 21st century at its best!

Although Grexit was avoided through last-minute compromise, Europe is not necessarily in a good place. EU representatives, who negotiate so devotedly, have made their bed and now must lie in it. There were many excellent arguments against monetary union and the common currency. The euro was born of will, not necessity – an excellent example of the sovereign power still possible in politics today. It was a half-cooperative, half-antagonistic German-French axis that ensured the euro’s existence. François Mitterrand wanted a common currency to both integrate and control the newly enlarged, economically strong German state. Helmut Kohl, chancellor of a country displaying humility despite an awareness of its resurgent power, agreed – in part because he wanted Europe’s blessing for German reunification.

Today, Greece is undergoing the terminal moraine of this decision’s fatal flaw – the compromises formed in the euro’s construction. Two economic and developmental philosophies were forcibly married, even though they were clearly not compatible: free market orientation and interventionist policy, liberalization and regulation. Much of the euro treaty was left intentionally vague in the hope that the dynamic of the euro would cause these contradictions to simply evaporate. This was only possible because the Germans holding the euro negotiation reins were not “Ordnungspolitiker” (politicians with a strong sense for order and procedural policy-making, such as then Finance Minister Gerhard Stoltenberg), but instead were European integrationists (Kohl and German Foreign Minister Hans-Dietrich Genscher). The Stability and Growth Pact from 1997, underpinning the euro, was an attempt to reconcile these two contradictory goals even in its very title, but has actually conjured dissent.

It has not been quite as Mitterrand had hoped. Germany’s economic strength did not decline; instead it continued to flourish despite turbulence surrounding reunification and the turn of the century. The cleft between north and south grew; in the latter, the introduction of the euro created a spending bubble that harmed economic strength. The EU, now more powerful given its eastern enlargement, today experiences exactly the north-south problem that philosophers and practitioners never envisioned, with folk psychology having been banished to the dustbin of history. These amicable EU agreements have contributed to “Olive Belt” states assuming giant debts they cannot shoulder themselves or even with EU aid. It must be a difficult pill for the Greeks to swallow that today, the leading German politician touting “more Europe” is also the leading Ordnungspolitiker, in contrast to 20 years ago. In trying to do the right thing, Wolfgang Schäuble worked out the central eurozone dilemma with relentless acuity.

It is in no way assured that Schäuble’s path is passable for every eurozone country, even those with the best intentions. In 2009 Germany’s Constitutional Court ruled on the constitutionality of the Lisbon Treaty and was scolded by many for answering maybe. Yes, it is constitutional, but only in a restricted sense: “Unifying Europe on the basis of a treaty between sovereign states cannot be realized in any way that does not allow each of the member states enough room for the political organization of its economic, cultural, and social living conditions,” the court pointed out. Greece chose to follow the eurozone path. While many in the north knew exactly what they were getting into (but held their tongues for the sake of peace), the Greeks clearly had no idea. They believed they had entered a community of guaranteed economic success. Now they are realizing that their desire for the euro has likely cost them any room for the political organization of their economic, cultural, and social living conditions. Neither the EU nor Schäuble should take this condition lightly.

There is little to suggest that Greece, as it lives and breathes, has either the will or the power to rebuild its state. Prime Minister Alexis Tsipras faces a Herculean project in which there will be a strong desire to let the situation degrade further, to delay land registry reform and taxation of the rich, and to rely on both the forgetfulness and the clemency of the EU. Tsipras may wield a lot of power, but any attempts to reform Greece will have to contend with ingrained traditions and mentalities that have stymied progress so far.

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© dpa Picture Alliance/Panayiotis Tzamaros

Paul Krugman recently did something amazing. The American economist, Nobel laureate, and columnist said he had been mistaken. He said he had perhaps overestimated the competence of the Greek government. He said he was shocked that Syriza campaigned for a No in the referendum on the old aid package offered by the country’s creditors without a plan B for the eventuality that further financial aid might not be forthcoming. And in the third aid package, Greece now has to face conditions that are clearly worse. That, he claims, was a shock.

This was not Krugman’s only error. He has criticized European crisis management – particularly that of Germany – in his New York Times column for years. Now he provides a very American assessment of the crisis: radical austerity policies cannot heal economies in recession. In his view, this will most likely send over-stretched states into an even deeper crisis.

This criticism ignores the fact that for some time now there has been no pure austerity. Even Greece has been offered an extensive investment program. And the examples of Portugal and Ireland show that policies of cuts and savings can bear fruit – and that Greece is a special case.

But the American reading of the crisis exposes something more basic: few people in the US administration, in the Capitol, and on Wall Street understand the European project. German Finance Minister Wolfgang Schäuble, who is now portrayed in the Anglo-Saxon press as a bad, anti-European German, made the point in his own manner – he said Krugman was an important economist and trade theorist, but one who had “no idea” of the history and principles of the European currency union.

Krugman is, of course, not America – but Barack Obama has repeatedly voiced his own concerns about German handling of the European debt crisis to Angela Merkel. An American diplomat recently adapted Donald Rumsfeld’s phrase when he said that what worries Washington were the unknown unknowns. The US, for its part, struggled during the 2008 Lehman crisis because its own analysis had factored in only the known unknowns.

This poses a question: do Europeans think they know how the financial markets would react to a Grexit because the eurozone has secure firewalls? Are all the variables really visible – “known” unknowns? The question is of course legitimate and justified. Stability on the financial markets is undoubtedly good for Europe and the US.

But there are other factors to consider, questions of currency, constitutional concerns, and geopolitical matters. At the end of the day, a trade-off was needed – and Brussels decided to keep Greece in the euro. A third support program is on its way.

The German government is itself not exactly a bulwark of unity – Schäuble still considers a temporary Grexit the better option, while Vice Chancellor Sigmar Gabriel disagrees. And Angela Merkel? She is certainly not shooting for a Grexit, but she needs the option in her negotiations and deploys her finance minister to this end. She does this not to blackmail Greece, nor to rob Athens of its sovereignty, and certainly not to secure German dominance in Europe. Rather she uses it to fend off blackmail from the Tsipras government, which was aimed at dismantling European rules of engagement. These are two kinds of rules – economic rules without which, as we now know, a common currency cannot function, and constitutional rules and conventions without which the European project would be at an end.

Both were put at risk when Alexis Tsipras’ government used a national referendum to try to upset the democratic decision making process in the eurozone and EU. How could a compromise be made in Brussels in the future if every member state were to take absolute positions, backed by national votes? “Going public” would then mean “going down”. That, not the lack of a plan B, Professor Krugman, was the shock delivered by the Greek referendum and the government’s plea for a No vote.

If the EU intends to have influence in tomorrow’s world on an equal footing with the US and China it needs to be taken seriously, both in terms of its economic power and its ability to solve political problems. Brussels is united in this view, as is Berlin. Merkel, Schäuble, and Gabriel saw Tsipras’ actions as an ideologically driven attack on Europe’s consensus machinery.

And as far as the bad German is concerned – it may be difficult to explain to the Anglophone public, but Schäuble is the most convinced European within the German government. He is still hoping that the debt crisis will eventually offer the chance for more European governance. Today that requires a person to have a great deal of optimism, and be a committed European indeed.

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© REUTERS/Axel Schmidt

Watching Germany’s finance minister Wolfgang Schäuble of late in Berlin has been like watching a reborn Francis Urquhart, the irredeemably devious politician played by Ian Richardson in the original BBC version of the political drama “House of Cards”.

For the last two weeks, as the Greek bailout storm clouds returned, Schäuble has been sending out thunderbolts in all directions – electrifying Athens, Berlin’s EU partners, and even his own boss, Chancellor Angela Merkel.
 For the last five years she has counted on her flinty finance minister to negotiate tough EU-IMF bailout deals with crisis candidates, and then sell them at home to her increasingly skeptical Christian Democratic Union (CDU) MPs and voters.

But cracks have now appeared in Berlin’s most fascinating political relationship.
 It all began two Saturdays ago when, at yet another crisis meeting of euro finance ministers in Brussels, Schäuble launched a strategy Francis Urquhart called “putting the stick about”. His ministry circulated a paper to other euro finance ministers – and a German Sunday newspaper – that Greece should consider a “time-out” from the eurozone to restructure its unsustainable debts.

The ministry insisted that they were merely following the logic of failed bailout talks with Greece to its conclusion. But many of Berlin’s partners were horrified that the euro’s corner-stone member was, in effect, drizzling blood into the shark pool to see what would happen.

What happened was this: the “time-out” option never made it into the final roadmap to a third bailout, agreed 24 hours later after an all-night leaders’ summit in Brussels.
 Chancellor Merkel had intervened to take the Grexit stick from her finance minister. But, three days later, he was waving it about again in a curious broadcast interview.
 On Germany’s most influential radio show he said Greece had no future in the eurozone if it wants to restructure what most people view as an unsustainable debt burden.

Critics around Europe have decried his “time-out” proposal as a dagger to the heart of the currency union and European integration.
 Schäuble disagrees. Two decades after he devised the concept of a two-speed Europe in a 1994 paper, he has believed that keeping Greece on board, whatever the cost, is a sure-fire way to a no-speed Europe.
 However, loyal minister that he is, Schäuble left those concerns at the Bundestag door when German MPs voted last week to allow Berlin open talks with the Greeks on a third aid program. 
It was a bizarre piece of political theatre when, in a nod to Greek leader Alexis Tsipras, Schäuble made the case for the third program in which, on the radio a day earlier, he admitted he doesn’t believe.

Senior coalition figures in Berlin say that Schäuble has been “agitating” against further aid for Greece with CDU backbenchers for some time. 
In the Bundestag last week, however, he left it at reminding deputies that they will have another chance to vote on any actual program, some time in August. Then, if he wants to, Schäuble could sow a few more seeds of doubt about Greece’s eurozone future and recast the third bailout vote as a confidence vote in Merkel’s euro crisis strategy.

In a final masterstroke before his holidays, Schäuble put the stick about again in Der Spiegel, underlining his differences with his boss on Greece and floating the idea of a resignation. 
German ministers are primarily responsible to their office, he said, and no one can force them to act against their convictions. 
“If someone tried that, I would go to the president and ask to be discharged,” he said. Asked if he was thinking about such a step, Schäuble replied innocently: “No, how do you hit on that?”

It was classic Francis Urquhart: plant an idea in someone’s head and, when asked for more, say, “You might think that, I couldn’t possibly comment.” 
A day later, a flushed Angela Merkel insisted on public television that “no one had asked me to be discharged.”
 With that, the chancellor and her finance minister headed off on holidays and put some distance between them: Wolfgang Schäuble to the fresh North Sea breezes of Sylt, Angela Merkel south to the bombast of Bayreuth and on to the Dolomites.

And those of us in Berlin are left with a tantalizing question, like a great television cliffhanger: if push came to shove, and Merkel’s disagreement with Schäuble on Greece escalates, who would CDU deputies listen to more on a third bailout vote?
 Neither politician has deep roots in the back benches but, when Merkel thanked her finance minister for his “hours and endless hours” of work in the euro crisis last week, the sustained Bundestag applause for him was far more enthusiastic that any she’s ever earned in the chamber.

So what if, after 43 years in the Bundestag, the 72 year-old Schäuble has reached the end of the road and has decided to give Angela Merkel a kick on the way out to even an old score?
 Schäuble was once Helmut Kohl’s crown prince and, in 1998, his successor as CDU leader until both became ensnared in an illegal party donations scandal.
 Kohl refused to name his donors while Schäuble admitted that an arms lobbyist gave him an envelope containing 100,000 Deutschmark for the party coffers.

The scandal was enormous, the credibility of the party in tatters. Spotting her chance, Angela Merkel, then Schäuble’s number two, broke with him and her mentor Kohl to snatch the party leadership in 2000. It was five years before they worked together again, after Merkel invited her former boss to serve in her cabinet.
 As finance minister since 2009, Schäuble has become the most influential bailout negotiator in the Eurogroup of finance ministers – and one of the most loathed men in Europe.

But not so in Germany. 
His tough line on bailouts in general, and Greece in particular since 2012, has seen him nudge past Angela Merkel in opinion polls, with 69 percent popular support compared to her 68 percent. Just 21 percent of Germans are dissatisfied with the finance minister’s work, compared with Merkel’s figure of 28 percent. 
With his open campaigning against Greece staying in the eurozone, Schäuble is in good company. Neither Germany’s Bild tabloid, nor the conservative Frankfurter Allgemeine Zeitung (FAZ) broadsheet nor a who’s who of influential German economists believe that anything more can – or should – be done for Greece.

On Friday (July 24) the Handelsblatt business daily has made Schäuble its cover boy. Merkel may be the queen of hearts, but the Handelsblatt have crowned Schäuble the “Kanzler der Vernunft” – chancellor of reason, rationality, or sanity. 
Of course, after a decade in power, Angela Merkel remains at the peak of her powers; unassailable and beholden to no one. Almost.

Her one vulnerability might yet prove to be Schäuble, a man she needs now more than he needs her.
 If he decides he’s had enough of politics, enough of all-night crisis sittings in Brussels, enough of empty Athens promises, he could decide to depart the stage quietly. Or he could leave with a bang over Greece. Some 16 years after Angela Merkel humiliated him, Wolfgang Schäuble could yet return the favor.

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