Readying Germany for battle royale

A WEEK ago, a spring had returned to the step of the financial markets, amid growing confidence that Europe’s dithering leaders would cobble together a credible plan at the summit of leaders due to take place at the weekend.

Readying Germany for battle royale

The mood then darkened considerably. Nerves were once again frayed.

The rioters were back on the streets of Athens. The cost of 10-year Italian debts were back above 6%.

France’s cherished triple A sovereign credit rating was in the balance following a downgrading from the credit rating agency Moody’s.

By yesterday, the mood had again changed. The fickle markets were sunny, once more, yet the shadows lurk with intent.

The balloon of optimism was really punctured on Tuesday when the German Finance Minister Wolfgang Schaeuble warned that there would be no easy solutions for the sovereign debt crisis.

The finance minister was simply stating the obvious — nevertheless it sent the traders into a spin.

France and Germany are at loggerheads over the best means to contain the spillover from Greece, with bondholders, many being French banks, facing losses of anywhere between 30% and 50%.

French banks have lost over half of their value on the stock exchange as it has become clear that the Greek mess could no longer be contained, making a restructuring inevitable.

Since early July, the prospect of contagion has been to the forefront, following the run on Italian bonds,

The French, fearing the loss of their coveted AAA rating, are seeking the transformation of the European Financial Stability Facility (EFSF) bailout fund into a fully fledged bank.

The Americans and British are seeking an increase in the rescue fund from €440 billion to anywhere up to €2 trillion.

Berlin and the majority on the board of the European Central Bank (ECB) are balking at a move which would, in their view, unleash the forces of inflation and have to be financially underwritten in large part by the German taxpayer.

The Germans have put forward the idea of using the EFSF as a bond insurance mechanism.

The idea is that the first 20% of losses on investments in certain Government bonds would be covered by the fund.

The French fear that such a move would divert investment flows away from French government bonds towards those issued by Italy and Spain, thereby raising France’s sovereign borrowing costs.

There is also uncertainty over the amount required to recapitalise Europe’s banks ahead of the expected deeper Greek restructuring.

The German Chancellor Angela Merkel is feeling the strain. Having steered plans for a boosted EU rescue fund through the Bundestag, the national parliament, the German leader finds herself once again hemmed in — caught between the devil of a sovereign debt crisis and the deep blue sea of increased euro-scepticism on her home political turf.

Merkel has outlasted most of her contemporaries and has come to rely heavily on her finance minister, the veteran politician whom she succeeded as Christian Democrat party leader, following a political scandal back in 2000.

Schaeuble is to Merkel what Michael Noonan is to Enda Kenny, a wily old operator with buckets of experience in the twilight of his political career, ambitions for the top job now well and truly put aside.

Both men, Schaeuble and Noonan, have come back from the political grave. Both retain an adherence to philosophies drawn from another era: whereas Noonan is at heart a ‘Just Society’ Fine Gael social democrat, Schaeuble is one of the last believers in the great Federal Europe project, still operating at the top of political life in Germany.

Wheelchair-bound following a 1990 assassination attempt mounted by a lunatic gunman, the 69-year-old Schaeuble is above all a survivor.

A onetime taxman, Schaeuble joined the youth division of the governing Christian Democrats (CDU) — becoming a close confidante of Helmut Kohl, German chancellor from 1982 to 1998.

Kohl steered through German unification and was a strong euro federalist.

Schaeuble served as interior minister, chief whip and as head of the chancellor’s office.

It all nearly went pear-shaped for him when Kohl was humbled following the discovery of large political slush funds.

Schaeuble admitted receiving a 100,000 deutschmark donation from a business big wig.

The revelations forced Schaeuble out as party leader, two years after succeeding Kohl.

His successor was the plodding low-profile Merkel, another Kohl loyalist who has proved adept at seeing off her enemies.

She enlisted Schaeuble as an ally. He returned to centre stage as interior minister when Merkel took over as chancellor.

Schaeuble bucked German political opinion in backing the invasion of Iraq.

He has offended liberal sensitivities by endorsing the campaign of assassination of terrorist leaders by US drones.

Shifted to the finance portfolio, he has since adopted a more nuanced style.

He has been to the fore in pushing for bondholder burden-sharing as a means of easing the Greek crisis, annoying the French in the process.

Six weeks ago, an article in his name was published in the Financial Times entitled: Why austerity is the only cure for the eurozone.

In his view, “piling on more debt now will stunt rather than stimulate growth in the long run.”

While acknowledging concerns that fiscal consolidation could undermine demand in the short run, deepening recession, he denied that this was a foregone conclusion.

Even if it were, there is a “trade off between short-term pain andlong-term pain”, in his view.

Schaeuble has pushed for a financial transaction tax against British opposition and has expressed unease at any sudden leap towards fiscal union and joint liability — no surprise, here.

Ironically, Schaeuble is viewed at home by some people as a closet euro federalist.

He was recently attacked on this ground by the German newspaper, Der Spiegel. The newspaper has a point. The finance minister may already be preparing his government and its electorate for some tough decisions which will hit Germans where it hurts most — in the pocket.

A condition for such sacrifice could be real moves towards fiscal union among euro states, involving for example, the use of euro bonds.

Twenty years after unification, the cheque book could be out again, big time.

Not for the first time, however, the political calendar and popular sentiment in Germany are serving as obstacles to measures required to stabilise theeuro and the euro project.

The German public has yet to realise that by turning its back on Europe, it could reap unthought of consequences.

The geopolitical implications of a fragmentation of the european project are already being considered in places such as Warsaw, close to the border with Russia.

Schaeuble is out there ahead of his public. But can he bring his people, and his chancellor with him, and if not, just where exactly are we all headed?

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