Reluctant Angela Merkel must choose between Europe and austerity

Either way one of our sacred cows has to be slain.

Sport has a lovely habit of imitating life. After causing a huge upset by beating an impressive looking Russia, the Greek team, the lowest ranked team in the tournament, last night faced favourites Germany in the quarter finals of the European Championships. The action was as equal on the football field as it is in the economic one. The Germans won comfortably even though it’s a fair bet that most fans were rooting for the underdog. Against the backdrop of a continent in crisis, it's difficult to guess which country most enjoyed their sporting success.

The eurozone crisis is rapidly becoming as damaging to Germany’s political image and international status as it has been to the Greek economy. The dogged and formidable Angela Merkel has found herself playing the role of the pantomime villain. The latest issue of this magazine described Angela Merkel as “Europe’s most dangerous leader” while successive summits at EU and G8 level have seen her politically isolated and singled out as the one leader able to solve the eurozone crisis. How can it be that hard-working, competitive and austere Germany deserves to be lampooned as the chief roadblock to reform and potential wrecker of the euro?

This is arguably the first time since the creation of what has become the EU that Germany finds itself alone in controlling the continent’s destiny. It is a very uncomfortable and unwanted position because despite being Europe’s strongest economy by some distance, Germany has rarely sought to dominate European politics, often keen to acquiesce to France. A case in point was during the ill-fated second round of accessions to the euro. The German government did not want Greece, which even in 2002 had a debt to GDP burden over 100 per cent, far above the 60 per cent limit spelt out in the Stability and Growth Pact, to be allowed to join. French President Jacques Chirac insisted that the ‘cradle of democracy’ had to join the club.

This week saw the latest round of subtle Germany-bashing in the European Parliament. At the end of last year the European Commission published a green paper on the introduction of stability bonds – the slightly Orwellian name now used to describe joint liability eurobonds. It is well known that the Commission is keen to prepare legislation, while a clear majority of MEPs are also in favour. But a few countries, including Germany and Finland - another country with a AAA credit rating – remain strongly opposed.

After listening to socialists, liberals, greens and several of his own conservatives backing a report on eurobonds drafted by French liberal Sylvie Goulard, Werner Langen, the leader of Merkel’s CDU group of MEPs, dismissed it out of hand, insisting that all the proposals on the table, including the European Redemption Fund put together by the German council of economic experts, would require treaty change. In fact, the accuracy of this legal interpretation is far from clear but, in any case, his robust stance was largely for effect. Deep down, he and his party leader can see which way the wind is blowing.

There are two articles of faith shared by all of Germany’s significant political parties – a belief in European integration, and a commitment to balanced budgets and strict monetary policy. The first is the result of the wars which blighted Europe and saw Germany divided for over 40 years, the second, the product of hyperinflation and economic collapse in the 1920s seared into the national conscience.

Indeed, this has been borne out in every edition of Newsnight featuring a German politician during the crisis. They cannot comprehend why countries should choose to live beyond their means, and because austerity works in Germany, they cannot understand why it can’t work for the rest of Europe. It is like asking Labour politicians to renounce the NHS.

Merkel’s biggest mistake – though she is not alone in this among EU leaders - has been her refusal to tell the truth to the German people about the euro. As Europe’s largest exporting nation, Germany has, by a distance, been the biggest beneficiary from the single currency. At the European Central Bank in Frankfurt, interest rates and inflation have been tailored to suit the economies of Germany and the rest of the ‘virtuous north’. The euro has helped make the German labour market more competitive.

However, Merkel has refused to admit this, instead falling back onto the facile argument that countries are in difficulty because of rampant overspending and economic mismanagement. In the Greek case, it is true. For the likes of Spain and Ireland, who ran balanced budgets for much of the last decade before being pole-axed by the huge losses of private banks, this charge is offensive and plain wrong.

The tragedy for Germany is that it now finds itself in a no-win situation. To German eyes the euro represents arguably the single most iconic triumph of European integration. But the reality is that if the European Central Bank and the eurozone bail-out fund, the European Financial Stability Facility, are not allowed to buy government debt as a lender of last resort, and the terms of fiscal consolidation programmes are not relaxed, then the euro will collapse within months.

The frustration for others is that it has been blindingly obvious for over two years that austerity alone would do little other than plunge the weakest countries back into recession and drive the single currency closer to rupture.

For most of the last two years the blame for the debt crisis has been centred solely on the apparently profligate countries in the South Mediterranean. Now it seems to have shifted almost entirely upon Germany’s shoulders. The truth is that both are complicit in turning what should have been just a localised insolvency of Greece and parts of the European banking sector, into a seemingly existential battle for the future of Europe.

A friend of mine told me last autumn that the succession of emergency EU summits, each time aimed at ‘saving the euro’, was like watching the world’s slowest strip-tease. Each time political reality has forced Merkel to give up a bit more, from a temporary, now permanent bail-out fund, to the ECB buying up stockpiles of government debt. This is why joint issued project bonds to fund infrastructure programmes are being established and, in the medium-term will be joined by a common eurozone debt market. Indeed, I would expect a variant of the German Redemption Fund to have been agreed by the end of this year. Why? Because although the German government doesn’t like the idea, it dislikes it less than the alternatives.

Everybody knows how this saga ends – either Merkel will back down or the euro falls apart. Ultimately, it is up to Germany, and to Angela Merkel, what path to choose. Will it be Europe or austerity? Either way, at least one of the country’s sacred cows will have to be slain.


Flags fly in front of the European Parliament in Strasbourg. Photograph: Getty Images
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How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

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