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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After a year of division, a new centre is emerging in Labour

Clive Lewis, Lisa Nandy and Jonathan Reynolds show how factionalism is being transcended. 

On 26 September, Clive Lewis sat onstage at Labour’s conference in Liverpool and puffed out his cheeks in exasperation. He had just been informed that a line in his speech as shadow defence secretary committing the party to Trident renewal had been removed by Jeremy Corbyn’s office. Such was his annoyance that he was said to have later punched a wall in anger ("I punched no walls," he told me when we recently met). 

For Lewis, however, the feud proved to be a blessing. Hitherto hostile MPs hailed his pragmatism and deference to party unity (he is a long-standing opponent of Trident renewal). The former soldier also affirmed Labour’s support for Nato and for collective self-defence. “The values that underpin Nato are social-democratic values: liberty, democracy, freedom of expression,” Lewis, an early Corbyn ally, told me. “Let’s not forget, it was Clement Attlee and the New Deal Democrats who initiated and set up Nato. It’s about being in it to win it. It’s about winning the arguments inside Nato and making sure that it’s a force for good. Some people would say that’s impossible. I say you’ve got to be in it to be able to make those changes.”

In October, Lewis was replaced as shadow defence secretary by Nia Griffith and became shadow business secretary. Many regarded the appointment as a punishment. “Do I think there was an ulterior motive? I’ll never know,” Lewis said. “I’m confident that the reason I was moved – what I was told – is that they wanted me to be able to take on a big portfolio.”

Whatever the truth, Griffith has since said that Labour’s next general election manifesto will include a commitment to Trident renewal and will support multilateral, rather than unilateral, disarmament.

Many MPs had long feared that the divide between them and their leader would prove unbridgeable. Some contemplated standing on bespoke manifestos. Yet with little drama, Corbyn has retreated from a conflict that he could not win. Labour’s conference, at which the largely pro-Trident trade unions hold 50 per cent of the vote on policy and which the leader has vowed to respect, would never have endorsed unilateralism.

“Jeremy Corbyn deserves credit for that,” Lewis said. “Everyone understands that his position hasn’t changed. He still believes in unilateral disarmament . . . But he’s also a democrat, and he’s a pragmatist, despite what people say.”

In policy terms, at least, Labour will contest the next general election as a less divided party than many anticipated. As Corbyn’s team has long emphasised, there is unity around issues such as opposition to spending cuts and support for rail renationalisation. A new centre for Labour, embodied by Lewis, is emerging.

“When I became an MP,” the 45-year-old told me (he was elected in Norwich South in 2015), “to be anti-austerity, to say that cuts don’t work and they’re bad economics, meant you weren’t in touch with reality, and that you had no interest in winning elections. Within the space of 18 months, there’s now a growing consensus that cuts aren’t the way forward and that we need an industrial strategy.”

Theresa May’s support for new grammar schools and “hard Brexit” has given Labour MPs other issues to unite around. After Corbyn’s second landslide leadership victory, many of his opponents have reached the final stage of grief: acceptance. Others, as Lewis noted, are imbued with “an eager enthusiasm to make this work”. Contrary to some predictions, more than half of the 63 frontbenchers who resigned last summer have returned.

An emblematic figure is Jonathan Reynolds. The Liz Kendall supporter, who resigned as shadow transport minister in January 2016, has rejoined the front bench as shadow City minister. Earlier this year, Reynolds backed the introduction of a universal basic income, an idea that is now being explored by John McDonnell’s team (and that Barack Obama has called for “debate” on). In July, Reynolds and Lewis wrote a joint piece in support of proportional representation (PR), warning that without it “a more equal, democratic and sustainable society is less likely”.

Another advocate of PR is Lisa Nandy, the former shadow energy secretary and a friend of Lewis (on 26 October, along with Reynolds, they called for Labour to stand aside in the Richmond by-election to aid the Liberal Democrats). In the view of some, the defining divide in Labour is no longer between left and right but between open and closed. On one side are pluralists such as Lewis, Reynolds and Nandy, while on the other are tribalists such as Ian Lavery (pro-Corbyn) and John Spellar (anti-Corbyn).

The division stretches to the top, with McDonnell in favour and Corbyn opposed. “It’s a work in progress,” Lewis said of his efforts to convert the Labour leader. “There’s a growing movement of MPs who now either support PR or understand the growing necessity for it. They may not be quite there themselves, but they’re moving in that direction.”

At times since Corbyn became leader, the parliamentary party’s divisions have appeared to many to be insurmountable, even as the party in the country has grown and been inspired by Corbyn. Yet a new consensus is being forged in the PLP: anti-austerity, pro-Trident, pro-Nato and, increasingly, committed to political and constitutional reform. If there is any consolation for a becalmed Labour Party, it is that its European counterparts are faring little better. In Spain, France and Germany, an already divided left is further fragmenting.

But Labour is likely to both fight and survive the next general election as a united force. If Lewis can retain his seat in Norwich (he has a potentially vulnerable majority of 7,654), he could one day act as the bridge between the party’s “soft” and “hard” left. After a year of factional skirmishes, the common ground in which Labour’s future will be shaped is emerging.

George Eaton is political editor of the New Statesman.

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage