Friday, September 06, 2013

Continuity and change in Germany's EU policy

However the Germans vote on September 22nd, Berlin’s attitude to the EU is not going to change much. The opposition Social Democrats call for a bit less austerity in Southern Europe but otherwise support most of Chancellor Angela Merkel’s policies. Nonetheless German policy on Europe is evolving – independently of the elections – in some important respects.

Germany is making a new effort to revive its damaged relationship with France. It is moving towards accepting a full banking union, including a resolution regime, though not, for now, on terms acceptable to most of its partners. It is recognising – with some regret – that there will not be a significant revision of the EU treaties in the coming years. And it is increasingly critical of the European Commission and the European Parliament.

The big strategic decisions on Germany and the EU are taken by politicians like Guido Westerwelle, the foreign minister, and Wolfgang Schäuble, the finance minister, and, above all, Merkel. But the key officials in the Chancellor’s office, the foreign ministry and the finance ministry are hugely influential on EU policy. That is not surprising, given that they – unlike most politicians – understand the technicalities of the EU’s inner workings.

These officials are more relaxed about the euro than they were six months ago. They think that modest progress in Ireland, Portugal and Spain is vindicating their insistence on austerity in these countries. They regard Greece as a hopeless case, but too small to threaten the euro’s survival. Italy is a much bigger worry, because its political system seems to make structural economic reform impossible.

As for the Official Monetary Transactions (OMT) – the bond-buying scheme unveiled by the European Central Bank a year ago, which reduced the cost of borrowing for the Southern Europeans – it should be “a bazooka that is left in the cupboard”, according to one official. If ever used, the ECB’s independence could be compromised: politicians would put pressure on the bank to deploy the OMT to achieve a particular spread for a country’s bonds, he says. And what would the ECB do if, once an OMT programme had started, its beneficiary stopped reforming? This official thinks that if a country applies the right policies, as Spain has done recently, it does not need OMT. And if a country chooses the wrong policies, OMT cannot save it.

Germany’s constitutional court in Karlsruhe is due to rule on the legality of the OMT this autumn. The view in Berlin is that court is unlikely to ban the OMT outright, though it may set conditions for its use.

German officials think that France, unlike Italy, is capable of reform. But in his first year as president, President François Hollande infuriated German officials: he tried teaming up with Spain’s and Italy’s leaders to oppose Merkel at summits, and did very little to revitalise France’s economy. The Germans talked of moving ahead without France. The French found the Germans’ tone patronising.

But this summer the atmosphere between Paris and Berlin has improved a little.  The Germans understand that they cannot lead Europe on their own. They say they have learned that lecturing France will not persuade it to reform. Only if France believes that it is an equal partner of Germany’s, they think, is there a chance if it reforming. Meanwhile Hollande has not tried to manoeuvre against Merkel in the European Council since February (when he was in a minority of one over the EU budget). At the end of May, a joint Hollande-Merkel letter floated ideas such as a eurozone budget, a bank resolution regime, contracts for economic reform and a permanent president for the Eurogroup (which brings together the countries in the euro).

German officials hope that after the general election they can restart the Franco-German motor with a grand bargain. France would accept Merkel’s idea of contracts – it would have to negotiate structural reforms with the Commission – and Germany would agree to a modest eurozone budget, to reward countries that undertake painful reforms. Some Germans believe that these contracts would be the most effective means of getting France to reform. The bargain would also cover a bank resolution regime, which France is keen to see implemented. None of these steps would require treaty change.

Despite their new, softer line on France, some Germans still worry that the French will exploit Germany’s willingness – in the event of a serious crisis – to do whatever is necessary to keep it in the euro, and that they will therefore shy away from difficult reforms. France would then slowly drift into Southern Europe and Germany would find it hard to lead the EU on its own.

Banking union is currently a major bone of contention between Berlin and Paris. Schäuble wants a resolution regime with a first phase “based on effective co-ordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism (ESM) as last resort.” (see FT article by Schäuble). The Commission, however – backed by most member-states, including France – wants to run a centralised system that draws on a new resolution fund. The Germans think the Commission would not be capable of acting quickly to resolve a bank, and that, given the fund’s initial small size, they might end up having to pay to clean up others’ banks. They also argue that the Commission is abusing the treaties by using a single market article as the legal base for its proposal.

At the moment, the two camps are far apart. But German officials are convinced that the EU needs a viable resolution regime. A possible compromise, one suggests, could involve Germany accepting the Commission as the resolution authority, provided the ESM is the backstop. Germany likes the ESM because it is run by a German and it has an effective veto over its money being spent.

Many German politicians, being committed to a federal Europe, retain some affection for the Commission and the European Parliament. But the key officials have become very critical of both bodies. They say that the Parliament has too much power and is out of touch. So when it comes to the proposed ‘new’ method of choosing the Commission president – the idea is that after the 2014 European elections, the party with the most MEPs would appoint its designated candidate – German officials are wary. They fear that this method could lead to a powerful Commission-Parliament alliance against the Council of Ministers (in which Germany is a dominant force). This wariness extends to senior German politicians. Without the co-operation of Angela Merkel and her European People’s Party, MEPs may struggle to impose the president of their dreams on the European Council.

Officials complain that the Commission lacks economic expertise, that it produces too many meddlesome rules, and that it spends too much time worrying about its own power. It annoyed them recently by pushing ahead with a directive banning certain greenhouse-gas coolants that are used in Mercedes air conditioners. And they are frustrated that the Commission gave France extra time to meet the 3 per cent budget rule, without first extracting commitments on structural reform.

Some German officials are keen to build up the ESM as an alternative to the Commission for eurozone governance. They admit that the ESM currently lacks economic expertise but think that in the long run it could evolve into a European Monetary Fund. They believe that in contrast to the Commission it is not subject to political pressure. However, some foreign ministry officials understand that Germany is rather isolated in its desire to bash the Commission. For example, Poland – an important German ally – is usually supportive of the Commission. These officials therefore believe that any German attempt to promote the ESM as an alternative will not get very far.

Another source of tension between Berlin and Warsaw is the Eurogroup. The Poles – like the British – want the key body for taking decisions in the EU to remain the 28-member Council of Ministers. They worry that building up the Eurogroup could hurt countries outside the euro, as well as the single market. Some German officials are ready to go along with France’s wish to develop eurozone-specific institutions. Merkel, however, is keen to maintain the importance of the 28, partly because of her warm relations with the Polish and British prime ministers.

Twelve months ago, German officials were all for treaty change; six months ago, they really hoped it would be possible, but recognised that it might not be. Now they think that in an ideal world, treaty change would be desirable, but they are mostly reconciled to its postponement for a long time. The reason is simple: the only other member-state that wants treaty change is the UK, which means that the chances of the whole EU adopting a new treaty are zero.

The top officials say that if there is to be a new EU treaty, it would have to be negotiated in 2016, as the various election and referendum calendars allow no other possibility. Any new treaty would be a small, “surgical” change that would not require a convention (a suitable model may be the fiscal compact, last year’s non-EU treaty that did not require ratification by all signatories before entering into force). But these officials acknowledge that there may well be no new treaty of any sort, and they say that the EU can cope perfectly well with the existing ones. (The finance ministry would still like a treaty amendment to strengthen the independence of the EU’s new banking supervisory mechanism, but that is a long-term objective. Its own plans for a resolution regime would not require an amendment in their first phase.)

Germany’s recoiling from treaty change will be unwelcome news to some British Conservatives. They have been counting on the EU needing a new treaty, and thus a British signature, in order to extract concessions – such as the repatriation of powers – from Britain’s partners. It seems unlikely that the British government will enjoy that kind of leverage before the referendum that David Cameron has promised in 2017.

Charles Grant is director of the Centre for European Reform

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