Playing Europe’s bad cop

When I came to Germany 12 years ago to cover the introduction of the euro, many Germans were reluctant to give up their beloved Deutsche mark.

Seen as the guarantor of their post-war economic prosperity, it seemed insane to them to ditch the rock-solid mark for a single European currency.

And now, with Greece now teetering on the brink of financial ruin, six out of 10 Germans don’t want their government to bail out fiscally irresponsible Greeks. They needn’t worry – Merkel has apparently decided to play hardball with her EU colleagues in regards to aid to Athens.

Berlin even appears on the verge of convincing its eurozone partners that Greece should first look to help from the International Monetary Fund (IMF) before expecting bilateral European aid.

But make no mistake: the Germans are only marginally less to blame for this crisis than the Greeks.

As a correspondent following the newly established European Central Bank over a decade ago, I spoke to countless economists supporting the switch to the euro yet warning about situations just like the debt-crisis now facing Greece.

The problem was plain to see: if eleven (now 16) countries agreed to a common monetary policy they would also need to more closely co-ordinate their fiscal policies. But what national government would willingly cede its budgetary powers to its neighbours?

The classic European fudge was the Stability and Growth Pact, which was supposed to impart Teutonic fiscal responsibility on more profligate southern Europeans. However, over the years the Germans have repeatedly flouted the pact’s three-percent deficit limit, effectively proving how ineffectual the European Commission is at the policing fiscal policy of eurozone members.

This is why Merkel is right not to throw German taxpayer money at Athens, but also why she’s the completely wrong person to be playing Europe’s “bad cop” in this Greek tragedy.

As Greece’s debt crisis has shown, it’s far too easy for the important dialogue between two nations using the euro to degenerate into insult-trading. Lamentations about how the Nazis stole Greek gold six decades ago, and Germans suggestions the “lazy” Greeks just sell an island or two for some quick cash, came not from the tabloid press, but Greek and German politicians.

Both Germany and Greece have indisputably profited from the introduction of the euro in 1999. Whereas Berlin no longer has to fear its neighbours will simply devalue their currencies to make their economies more competitive against Germany, Athens has been able to tap international credit markets much more cheaply as part of the German-led eurozone than when it had the drachma.

With a common fiscal policy for the euro area both highly unrealistic and unnecessary (no-one would expect California to co-ordinate with Mississippi when levying taxes or setting its budget), Europe instead needs an enforcer to step in and offer tough love when things get ugly. This is why the German initiative for a European Monetary Fund is a laudable step in the right direction.

An EMF should not simply be a eurozone version of the IMF. It would offer a financial lifeline to euro members in trouble, but it would also need to assume Germany’s bad cop role by having the power to force a country to get its financial house in order. Countries using the single currency would have to accept such restrictions if they needed help from this lender of last resort.

And if draconian budget cuts and other unpopular measures then sparked public anger, the respective national government could simply lay the blame on the EMF rather than Berlin or Brussels. Such an institution would essentially give countries like Greece the fiscal backbone to make difficult yet necessary political choices.

Merkel is right to take a hard line on European aid for Greece this week – but only if she can use it as leverage to get her eurozone partners to back the establishment of a proper fiscal enforcer for the 16-member currency union.

Only then will Berlin be able to hang up its badge for good.