Christopher Caldwell

Merkel’s sovereign remedy

Britain and Germany agree about the EU’s economics – but they’re still headed for an irreconcilable clash

Merkel’s sovereign remedy
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‘Europe is speaking German now,’ said Volker Kauder, parliamentary chairman of German Chancellor Angela Merkel’s Christian Democrat party, about a year ago. He was urging Britain to back Merkel’s plans for saving Europe’s rickety banks and state budgets. Last week, the Chancellor herself arrived in London to dine with David Cameron and deliver the message in person.

Cameron is in a tricky spot. The summit to determine the EU budget for the next seven years will be held on 22 November. A coalition of opportunistic Labour MPs and dug-in Tory rebels has just passed a non-binding amendment in parliament urging that the government accept nothing less than a cut in real EU spending. Cameron has tried to win himself a bit of wiggle room. ‘If there isn’t a deal that’s good for Britain,’ he has said, ‘there won’t be a deal.’ But Merkel wants to pin him down. ‘One can be happy on an island,’ she said at the European parliament in Brussels before she arrived in London, ‘but in this world they can’t be happy on their own any more.’

For Tories, a productive relationship with Europe’s leaders has always seemed to depend on breaking parliament’s attachment to its ancient sovereignty. If you are being told to throw away the most precious treasure you have, you are either reading the gospels or being played for a fool. Merkel, as it happens, is in a similar fix. She faces her own rebellion in the Bundestag, Germany’s lower house, where Eurosceptic Christian Democrat renegades, two dozen and growing, have deprived her of partisan majorities on votes involving the euro bailout. Few of them object to Europe in principle. It’s just that there have been too many bailout votes, and Germany’s liabilities now stretch into the hundreds of billions. The German high court insists that funds can be appropriated to bail out foreigners only by a vote of the Bundestag. A September poll on the euro in the newspaper Die Welt found two thirds of Germans wish they’d never joined.

Merkel is thus caught in a tug-of-war between German voters and various Eurocrats, bureaucrats and kleptocrats abroad. The voters, just like their British counterparts, want to make sure she doesn’t send any more of their money abroad than is strictly necessary. Their idea of how much is strictly necessary is zero. European officials, on the other hand, are intent on reminding Germany of its debt to history, which they would prefer to collect in cash. Merkel faces an election next September or October against the Socialist Peer Steinbrück, who was her finance minister when Socialists and Christian Democrats governed in a grand coalition. Steinbrück is a protégé of Helmut Schmidt, and is similarly at ease talking and thinking about economic concepts. That Steinbrück agrees with Merkel on most euro matters is both his strength and his weakness. A recent Emnid poll showed Merkel would thrash him, 51-26 (61-18 in the former East Germany), if elections were held today, even though the public trusts Steinbrück more on the economy.

The big difference between Merkel and Cameron is that, for now, Merkel has more to fear from Brussels politicians calling her a bad neighbour, or Greeks marching through Athens wearing pickelhauben and Hitler moustaches, than she does from an uprising among voters. She is mixing voter-pleasing rhetoric about fiscal responsibility with indulgence to those who fail to practise it. The Socialists are trying, earnestly and in vain, to convey this point to the electorate. ‘Germany is going to incur more debt in the Greece affair,’ said a frustrated Steinbrück at a special Bundestag session on the euro crisis in mid-October, ‘why don’t you just come out and say it?’ Party chairman Frank--Walter Steinmeier complained in the same debate, ‘You haven’t drawn a single red line that you haven’t crossed within six months.’

Merkel is not too far from Cameron in this respect. Britain and Germany do not have radically different ideas of the European economy, in the way Britain and France did when Jacques Delors was shaping it. ‘We know from our own experience,’ Merkel said in October, ‘that only by reforming the labour market can we get growth again.’ When the wheelchair-bound finance minister Wolfgang Schäuble came to meetings with George Osborne in London in late 2011, one aide was struck by the similarities in the two ministers’ economic philosophies. Both were ‘students of Rogoff’ — more specifically, of the lessons laid out in Carmen Reinhart and Kenneth Rogoff’s history of financial crises, This Time is Different. And both were interested in ‘Ricardian equivalence’, the idea that economic stimulus never works as well as envisioned because investors and consumers, knowing the government must borrow to stimulate, cut their own spending to prepare for higher taxes down the line.

What divides Merkel’s crowd from Cameron’s is not their economic worldview but their experience of history. Schäuble was the heir apparent to Helmut Kohl until he barely survived an assassination attempt in 1990. Like Kohl he is a conservative who feels that, in the wake of Germany’s Nazi past, neighbourliness is the highest form of German patriotism. Good for Schäuble. The Germans have stirring, generous, romantic ideas of what the euro represents. These ideas, though, are occasionally wrong. Last winter I asked a senior Bundestag member, a euro supporter, what Germany was getting out of the single currency. ‘No Wall,’ he said. ‘Sixty years of freedom and peace.’ It was hardly worth reminding him that the Berlin Wall not only came down before the euro, it came down before the Maastricht treaty that envisioned the euro. Merkel, although trained as a physicist and possessed of a steel-trap mind, speaks of the euro in similarly treacly ways. ‘At its heart, the crisis of the euro is a crisis of trust,’ she said recently. But she thinks ‘trust’ is something vaporous and subjective, like a whimsy. Investors see it as something -physical and verifiable, like the density of a gas.

Europeans have never really been able, even after long explanation, to understand that the essence of British Euroscepticism is constitutional, not economic. One of the crazier aspects of the run-up to this European summit is the articles in various continental publications suggesting carrots in exchange for which parliament might allow an increase in the EU budget. A salary freeze for Brussels officials, perhaps? New EU-funded programmes in the UK? This approach works where the argument is over costs. But in Britain the argument is over sovereignty. A bigger budget will allow the EU to provide what Walter Bagehot called the dignified part of government. A smaller budget simply means charging Britons a bit less to take their sovereignty away.

Germany, however, lacks sovereignty to begin with. For historical reasons, it has developed the habit of not governing itself, and its neighbours are shocked when it even makes the pretence of doing so. (When Gerhard Schröder, for instance, said during the Iraq war that Germany’s foreign policy would be made ‘in Berlin, and only in Berlin’.) Germany cannot act forcefully on the international stage. What it can do is guard vigilantly against people picking its pocket, something of which the French have given them ample experience over the decades. That is why the country is sceptical about eurobonds, debt instruments that would make all Europeans in principle — and Germans in practice — responsible for debt run up in any European country. As a matter of constitutional theory, Germany’s opposition is warranted. Since Germans did not incur Greek or Spanish or Italian debt, they cannot pay it. That would be taxation without representation. These are the sort of airtight points that Merkel tends to make at European summits shortly before she makes concessions.

Merkel was quoted in one recent newspaper profile as saying that eurobonds ‘would turn mediocrity into Europe’s yardstick’. She constantly suspects economists and other interlocutors of trying to trick her out of her debt-cutting virtue. The key to her majority is that her party abhors all ‘mutualisation’ of debt in principle but consents to it in practice. Her opposition has never been able to get this point across. Green leader Jürgen Trittin has recently accused her of approving eurobonds ‘through the back door’.

In June, Merkel agreed to use the European Union’s rescue fund, the European Stability Mechanism (ESM), to recapitalise banks. This autumn, though, she and the leaders of other triple-A-rated countries tried to renege on the agreement. Yes, they would bail out troubled banks, but not banks that have already been bailed out. That dampened Irish hopes of getting out from under a mountain of debt. Evidence of the rapport the Irish business press has developed with Mrs Merkel includes this editorial in Dublin’s Sunday Business Post: ‘The politics for our government of putting money into our banks is bad enough — imagine how it plays in Westphalia or Munich.’ A cold-eyed and true assessment.

Germany wants to provide other governments with solidarity, not welfare, even if, to Anglo-Saxon ears, the former is just a euphemism for the latter. The upshot of the euro crisis will be some kind of fiscal union, but what fiscal union means is not clear. Germany believes it means sending tax inspectors to Thessaloniki. Brussels believes it means sending cheques to Thessaloniki. In the October parliamentary debate on the euro, Merkel said: ‘We are of the opinion — and I speak for the whole of the German government on this — that we could go a step further by giving Europe real rights of intervention in national budgets.’ That is why Anglo-German relations are in for a rough patch. Some EU countries will be able to swallow this. Britain will not be one of them. It is the newest tragedy of German history that the rules of 21st-century sovereignty are being set largely by a country that has little sovereignty to lose.