«No solidarity without corresponding effort and no guarantees without control». This maxim, pronounced by the German Chancellor, Angela Merkel, in July 2012, summarizes Germany’s position in negotiations with those countries that have had to request assistance, in particular, and in the process of constructing Europe in general. A point of view that Germany has steadily made sure is being imposed. So is Europe’s future in good hands?
One thing is clear: Germany‘s involvement in the process of constructing Europe. Already in the second half of the last century, the country played a key role as a founding member of the European Coal and Steel Community, the origin of the current EU and its desire for a united Europe has remained intact since then. The reason is genuine. In addition to considerations of a geopolitical nature, the German economy is also largely supported by demand from the rest of the countries in Europe. Specifically, 57.1% of all German exports are to other EU member states. Germany is therefore one of the main countries that has most to gain from its neighbours’ growth.
German citizens are the strongest supporters, by far, of the process of European integration (see the graph below). This conviction is also reflected in the political arena. Regarding the coming elections in September, only the «Alternative for Germany» party is offering a clearly Eurosceptic programme while the country’s main political parties (which account for more than 90% of the intended votes) are clearly pro-European. This does not mean their view of how Europe should be constructed is exactly the same but, in the broader issues, their differences are small. For example, in the German parliament’s ballots held to pass the different bail-out programmes for Greece and Spanish banks, the two largest parties, the CDU and SPD, voted jointly in favour.
Although Germany seems to firmly support Europe, many European countries do not believe this is beneficial for everyone, especially on the periphery. The reason: the huge effort they have to make to hold onto their place in the Euro club. The perception is that Germany wishes to impose its model, which has turned out to be so successful, and that the rest of the countries must implement it no matter how tough these measures may be. Some countries argue that the euro area, as a whole, does not have any imbalances, not fiscal or macroeconomic, and that, in general, it boasts a healthy banking system. Given this situation, it is very tempting to conclude that, if the euro area had more powerful mechanisms to transfer resources between countries, these imbalances could be resolved quickly and without so many sacrifices.
However, this could not be further from the truth. If the underlying causes of the extensive fiscal, macroeconomic and banking imbalances in many countries on the periphery of Europe are not corrected, they will reappear sooner or later. On a matter of principle, Germany is one of the main countries defending this view. Moreover, given that it is enjoying a more favourable economic situation, it would be one of the countries that would have to contribute the most resources to such transfer mechanisms, a fact that makes Germany even more wary, if possible. One clear illustration of this is how each of the pillars that must support the new Economic and Monetary Union is being constructed (banking, fiscal and economic union).
Perhaps the place where the effect of the German view is most noticeable is in the process of banking union. This consists of three fronts: the creation of a single supervisor, a resolution mechanism for banks in difficulty that is also shared and an integrated deposit guarantee fund (DGF). The first of these three fronts has been given the most priority. Sole supervision by the European Central Bank should be in operation by the beginning of summer 2014 whereas debate is still going on regarding the other two dimensions. On the one hand, in order to completely remove the link between sovereign risk and bank risk, which has damaged some periphery countries so much, it is essential to advance towards a single resolution mechanism and a shared DGF. The urgency therefore seems justified. However, starting up these mechanisms could entail significant transfers of resources between countries if they needed to be activated. Should this arise, there should be no doubts regarding either the strength of the legal basis underlying them or, especially, the social and political support they enjoy. In other words, risks will not be shared if, previously, there are no mechanisms that allow greater correspondence between the responsibility assumed and the control exercised.
That is why Germany, with its finance minister, Wolfgang Schaeuble, at the head, is insisting on advancing more gradually, starting with a joint system of national authorities, minimizing solidarity between countries. This should act as a bridge while, on the one hand, the supervision exercised at present by the ECB ensures that all Europe’s banks comply with requirements and, at the same time, progress is made in redefining treaties to ensure these make room, and without any cracks, for the new instruments. In this respect, the German option aims to construct a strong banking union in the long term. But this is a risky option in the short term. Although many details have yet to be defined, with the advances made to date it would be difficult to avoid another episode of financial tension if doubts regarding the solvency of a European country’s banking or public sector resurfaced.
The progress made in fiscal and economic union has been more limited but has followed a similar path. The ultimate objective is clear: to set up a deeply integrated economic and fiscal governance framework that allows coordinated economic policy to be designed and public debt to be issued jointly. The goal is therefore ambitious. It requires European treaties to be modified and particularly greater mutual trust between EU countries. In the case of banking union, however, at present the only mechanisms started up are those that allow the economic and fiscal policy of the different member states to be supervised and, to some extent, directed by Brussels.
The German standpoint therefore seems to have been imposed in this area as well. The creation of Euro bonds or, in general, of a common financing mechanism, which has been proposed by the French president, François Hollande, seems to have been relegated to second place for the time being. Once again, first control then guarantees.
In short, to date it is the German Chancellor, Angela Merkel, who has set the pace of Europe’s construction. Without purporting to be a great leader, Germany is fulfilling this role. Without making any great promises, it has gradually outlined the path to be followed in order to achieve greater fiscal integration in Europe. Certainly the measures taken to date are not enough to avoid further episodes of financial tension. But nor would other measures that only temporarily remedy the imbalances of countries in difficulty. Ultimately, the only guarantee for achieving a greater degree of integration is by implementing an economic policy that unmistakably pursues balanced long-term growth. Germany is committed to this. Are the other countries too?