The Euro crisis and German primacy

Abstract: The main lesson from the crisis of the Euro, starting in 2008, is Germany’s assertion of primacy. The intent of the EU integration process was to put an end to what has been termed the “Westphalian” system of self-governing states because this was identified as the source of  Europe’s propensity to war. The idea has been to weld a growing apparatus of integration onto the states, in the hope that the older competition between potential rivals or allies would be replaced by predictable relations between “partners”. France was its lead champion. Germany joined in as a means to acquire equality in the society of states, and eventually to win  back state unity. This was achieved in the years 1989-1992, when the EU member states agreed to the Maastricht Treaty, creating a single currency under one central bank, the European Central Bank. But France, and the Latin countries have failed to adapt to the exigencies of monetary union without a federal  polity, and Germany claims that it is unready to underwrite the failures, unless there is a move to federal political union, requiring a new European constitution, and-the German Constitutional Court declares-a new German constitution or Basic Law. This is not about to happen.

The Franco-German “tandem”, lauded in the past as the driver of EU initiatives, is now the main impediment to exit from the crisis in the Euro zone. Simply, Berlin and Paris do not agree .  And Germany has made clear, that the resolution of the crisis has to be on German terms, and within the existing institutional set-up. The Euro crisis, now into its fifth year, coincides with the assertion of German primacy. The implication is that we are heading into a very different Europe, shaped more by traditional power politics than by the integration strategies of the past.


The Euro is first and foremost a diplomatic creation; an act of will by the participant states using Europe’s more traditional and also newer instruments of diplomatic statecraft.[1]  As divided Germany became embedded in the two alliances dominated by the US and the USSR, West Germany sought security in the Atlantic alliance, and reconciliation with France through European integration.[2]  France, too, sought security from a repeat of the disasters of 1870, 1914, and 1939 through membership of the Atlantic alliance and by efforts to create a European political structure from which war would be banished.[3] European economies were launched on the path to reconstruction through the creation of initial institutions designed with US support, to co-ordinate national economies on a European scale.[4] Since the late 1960s, monetary politics have lain at the heart of Franco-German relations, as the DM began its ascent on the back of widening trade surpluses to replace sterling as the world’s second reserve currency after the dollar. French diplomacy quietly jettisoned its policy, inherited from de Gaulle, in favour of a Europe of the states and adopted a more integrationist stance with regard to the EU. French diplomacy focused on the Bundesbank as the bastion of Germany’s financial and corporate power nexus, and the prime partner of the US Federal Reserve in managing the central exchange rate between the dollar and the DM. As Bundesbank Council member Wilhelm Nölling has written about monetary politics over the creation of a European currency, the controversy is “about power, influence and the pursuit of national interests”.[5]

In the following sections, we first discuss Franco-German relations over the four decades after 1971, the year when the world was launched by President Richard Nixon onto a dollar standard, obliging EU member states to negotiate a stable monetary and exchange rate order for their highly interdependent economies. Second, the end of the cold war in the years 1989-1992, prompted by the re-unification of Germany, saw both the birth of the single currency and the creation of political conditions for a more integrated global economy. By the time the crash came in 2008, the EU and its member states operated in a very different world to that prevailing in the early 1990s. The third section identifies the major fault-lines in the Euro project that were soon revealed by the crash. In the fourth, we assess some of the implications of Germany’s unabashed assertion of its leadership as the key arbiter of European affairs. The underlying theme here is that the Euro crisis could have been resolved immediately: it was not, because France and Germany had very different concepts of what should be done, and rather than back down, were prepared to let the European economy hang out to dry. The Euro crisis is a political crisis in relations between Paris and Berlin.


Franco-German relations from 1971 to 1992.

The signatories to the Rome Treaty of 1957 consciously made no reference to monetary union, on the grounds that it was too controversial, even though the idea had been an integral part of the federalist cause for a united Europe. But with the emergence of the DM as a key currency, inhibitions faded. The broad aim informing the policies of successive French administrations was to somehow dilute the Bundesbank’s power within a new European monetary regime, run on lines more compatible with the exigencies of the French economy. The first full-fledged proposal for monetary union along federal lines came in October 1970, when the Werner Report was presented to the Council of Ministers.[6] The proposal incorporated the German preference for price stability as well as stating the need for a sizeable EU federal budget. But governments pursued divergent national policies and the experiment was quickly buried.  Germany argued that it would not be possible to align exchange rates more closely in the absence of convergence in economic policies and performance. [7]

On August 15, 1971, President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus launching the world onto the dollar standard. This crucial decision consecrated the dollar as the world’s key trading and reserve currency. In March 1973, the  Bundesbank, decided to have the DM’s rate set on world financial markets. A second, more confederal monetary design for the EU was launched, when Chancellor Schmidt became convinced in the winter of 1977-78 of the urgency of extending the DM zone to incorporate the French franc, following the depreciation of the dollar, and upward pressure on the DM. [8] Tying the DM to a weaker franc would shield German exporters on world markets. But the European Monetary System (EMS), foundered for similar reasons to the Werner Plan: the Bundesbank was not prepared to risk importing inflation through interventions on the foreign exchange markets to sustain the franc. [9] In  February 1981, it unilaterally raised interest rates to unprecedented levels to stabilize the DM and stem the outflow of capital to the US.  It thereby imposed retrenchment on the European economies, and ensured the DM’s hegemony as Europe’s key currency.

The heyday of a DM zone disguised in ERM clothes came in the years 1981-87. When in 1981 President  Mitterrand decided to promote consumption and nationalize a swathe of companies and banks, external debt exploded, capital fled the country, domestic savings shrank and the franc devalued thrice against the DM.  A crucial episode was President Mitterrand’s decision of March 1983 to keep the franc in the ERM, and stabilize the French economy.[10] In support of this objective, Paris pushed through major bank reforms and created a “unified capital market”,[11] along Anglo-American lines.[12]  Subsequently, successive French governments managed to privatize, and to prevent French companies being “dissolved in Europe”- French shorthand at the time for takeover by German companies.[13] Market capitalization of equities rose from 5.5% gdp in 1982 to 37% by 1993, and 63% by 2002. By 2007, market capitalization in Paris was 107% gdp, compared to Germany’s 63%.

In 1985, national calculations drove the EU to launch the internal market programme, along with the liberalization of capital movements, and then the moves to monetary union. Finance Minister Delors had concluded that the only answer to stagnation in France lay in expansionary EU economic policies, and the creation of a “single European social space”[14], to accompany an EU internal market. [15] Delors had to accept German Chancellor Kohl’s insistence on liberalization of capital movements as a precondition to the proposed EU internal market, for which the Chancellor  was prepared to consider monetary union as a “goal”. But a removal of capital controls by the French government was bound to make the franc more vulnerable to speculation, while Bundesbank reluctance to intervene on foreign exchange markets in support of weaker currencies, indicated that France would have to align economic policy even closer than it already was on German priorities.

The French Finance Ministry’s preferred solution was for a common exchange rate arrangement on confederal lines, that allowed for the preservation of national currencies and regulatory authorities in cooperation with EU institutions.[16] By contrast,  successive German governments adopted a maximalist position in favour of a single currency, which implied a bold move to a federal polity for the whole of the EU.[17] The European central bank would have undisputed monopoly powers over a monetary policy dedicated solely to the achievement of price stability.[18] President Mitterrand considered the price worth paying for France to gain a voice in an independent ECB. [19]  But at the time of the French September 1992 referendum on the Maastricht Treaty, he clearly stated :`Those who decide economic policy, of which monetary policy is only one instrument, are the politicians elected by universal suffrage, the heads of state and government who make up the European Council”. [20] President Chirac returned to the theme, indicating thereby that the French concept of “economic governance” of the EU was not to be circumvented.[21]

There was thus plenty of unfinished business from the years 1988 to 1992, when national positions on the project for monetary union were negotiated “in Europe’s name”. [22] When the Euro was launched as a whole sale currency in 1999, and then as a retail currency in January 2002, it supporters anticipated that crisis was inevitable. As Romani Prodi, EU Commissioner President, said at the time : “I am sure the Euro will oblige us to introduce a  new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.” [23]

The unfinished business illustrated only too clearly that trust remained a scarce, but vital  resource for a fledgling currency. In the Maastricht Treaty of 1992 Chancellor Kohl had given Germany’s “irrevocable commitment” to the EU’s boldest project to date, the creation of the Euro. But Germany suspected France of seeking to inveigle it into an inflationary regime, while France feared being absorbed in a stability oriented system run according to German preferences, not French interests. These significant reservations came to the fore when the financial crisis broke in 2007. With trust scarce between Germany and France, agreement over remedies proved arduous, all the more so because each European member state has its  own national business system, crafted over time, each with its specific vulnerability, institutional nexus,  and mix of policy and performance.[24]  Policy for the Euro in fact has to be made in the EU institutions devised over the years to help the states manage the European  mosaic of highly interdependent units, each with its own history, neighbourhood, institutional configuration and political culture, and where each is bound differentially through multiple channels into the rest of the world. [25]   Not surprisingly, the states in the  European mosaic diverged in their responses to globalization.




Europe in a changing world:1990-2012.

In the key years of 1989-1992, it was Europe, not the U.S., which had the distinction of being both source and origin of the process which came to be called “globalization”.[26] At a stroke, German unity dismantled the cold war structure of two Germanies, the two Europes, their two alliances and the two great powers.[27] The collapse of this intricate, and multi-dimensional dialectical structure immediately substituted Berlin for Paris as the geographic centre of a wider Europe, launched the countries of central and south-eastern Europe on transitions out of the communist party-states, precipitated the disintegration of Yugoslavia into war, followed by the implosion of the Soviet Union and Russia’s independence. All countries previously embedded in, or attached to the communist system had no option but to become incorporated quickly into the interdependent global system. In 1991, India launched on an ambitious liberalization policy. The following year, in February 1992, the ageing chief man of China, Deng Xiao Ping, declared famously that China was open for business.

Twenty years on, the world had changed shape. East Asia in  1990 had represented 19% of global gdp with per capita income two thirds of the world average. By 2010, East Asia’s share of global gdp had risen to 28%, with per capita income just short of 90% of the world average. East Asia thus became the key world market place, with growth rates in the intervening years 3 times that of Europe and North America. Nowhere else in the world was the middle class growing faster. With the downturn in economic activity among developed countries after 2008, China became the prime locomotive of the Asian economy, and in 2010, overtook Japan as the world’s second largest economy. By 2012, China’s economy was five times the size of Russia’s and over two and a half times that of India. Asia’s share of world exports rose from 22% of world trade in goods and services in 1990 to 37% in 2010. Foreign direct investment  flowed in, attracted by the 30:1 differential in unit labour costs of advanced industrial countries compared to the manufacturing platform of China. With domestic savings at 50% gdp, and access to the EU and US markets ensured by its membership in the WTO, China’s current account surplus soared. Together, China and Japan by 2012 had amassed foreign exchange reserves respectively of  $3.2 trillion dollars, and $1.2 trillion. By 2012, both Japan and China’s net foreign asset position stood at 54% of their respective gdps.  Asia had become the world’s prime creditor.

Irrigated by the Asian savings surplus and also by US easy money policies, banks out of London busily sold structured products, including US mortgage business, to the more sleepy local banks in Germany and in the wider European market. Though not in the Euro, the UK became home to global Euro business, ranking as the prime global financial market place.[28]  In Germany, outward direct investment grew by a factor of 11 between 1990 to 2010, as business outsourced production to central-eastern Europe[29] away from the Mediterranean member states, and German corporations unraveled the inherited bank-industry cross-shareholding structures and moved to become global players responsive to the demands of global institutional investors. By 2011, China had become Germany’s second  key market after France, [30] with Société Générale estimating that China would account  within a decade for 15% of German exports. [31] In terms of total German sales, the figure would be much larger as German investment there rose from a meager 1.2% of total German foreign direct investment in 1990 to 12.6% by 2010.[32] German corporate profits responded accordingly. At home, German business drove down unit labour costs faster than France and southern Euro members, while lower value added producers in the Mediterranean states faced direct competition from Chinese producers on their traditional markets. By contrast, Germany’s exports and imports as a per cent of gdp rose to 90%, compared to Italy and France which stayed, as in 1990, at 50% gdp. Germany, along with Austria, The Netherlands, Denmark, Sweden and Finland,  was thus much better prepared than France and southern EU member states when the downturn hit in 2007.

The  most surprising feature of the world twenty years after the end of the cold war, though, is the emergence of the EU as the world’s prime emporium. This statement runs contrary to the conventional assessment of the region as ageing, economically stagnant, with high levels of public debt, fragile banks, low workforce participation, and a legislative preference for leisure over work. The EU is this, but it also enjoys enviable political stability; it is the world’s No 1 exporter, and the world’s No.2 importer; given that 16 of its member states account for below 2% each of the EU economy, there is a constant majority for open markets. Its labour force is the third largest in the world, and yields a per capita income of $34,500, less than the high productivity labour force of the US at $49,000 but six times that of China. The EU is China’s prime trade partner, as it is for Africa, Russia, the Middle East and Gulf states, the Mediterranean countries, while counting among the top trade partners of Latin American countries and India. More importantly, the European footprint on the world economy is giant size. It is overwhelmingly the world’s prime recipient of inward investment, and by far the largest source of foreign direct investment in the world. The EU is home to 148 compared to  the US 132 in the Fortune 500 list of global corporations for 2012. The dollar accounts for 86% of foreign exchange transactions in the world, and for two thirds of total reserve assets held by central banks;[33] but the Euro, is the world’s second trading and reserve currency. The EU is the home for 224 of the top world 500 universities, compared to the United States’ 155, and China’s 6. The list goes on. The conclusion is self-evident: as the world’s prime emporium, Europe’s political crisis of leadership is bad news for the global economy


The Euro, from launch to crash:1999 to 2010.

The Euro crisis is not economic, but political from start to finish. The Euro is a diplomatic construct, and introduced on a prospectus that eventually won the consensus of the EU élites. Once in place, it won only a modicum of public support. Average net support for the prospective currency fell from a high of about 45% in 1990 to under 20% in 1997, and then rose during the run up to the launch with strong support from the media. [34]  During the launch years of 1999 to 2002, support fell off. When the euro entered circulation in January 2002, net support surged from 43% to 55%, and from autumn 2003 settled into an average range of around 41% right through until spring 2011. The markets were more welcoming than European opinion. In its first two years of existence between 1999 and 2002, the Euro dropped to parity with the dollar, and had to receive emergency support from the G7 countries in the course of 2001. Under the ECB Presidency of the Dutchman, Wim Duisenberg, the ECB raised its benchmark rate to just under 5%, with consumer prices at 3% or below. In November 2002, the Frenchman Jean-Claude Trichet took over as President. With France and Germany favouring expansionary policies, ECB interest rates were lowered significantly, prompting an expansion of  credit in the EU, and coinciding with a growth in EU cross-border banking. [35]  Simultaneously, the Euro rose against the dollar, while the Euro’s share of foreign exchange reserves rose. As Alan Greenspan observed in Berlin on the occasion of the launch of his book, The Age of Turbulence: Adventures in a New World,[36] the Euro’s use as a reserve currency had led to a drop in euro-zone interest rates, and “without doubt contributed to the current economic expansion.”

Triumphalism was the tone of the Commission’s report of  May 2008 on Euro’s first ten years.[37] “The Euro”, it declared,”is a resounding success.”  The currency, it was noted,  enjoyed the support of a plurality of EU citizens.  A single monetary policy combined with national but coordinated fiscal policies had fostered macroeconomic stability. In the Euro’s first decade, inflation was down to just over 2%, with nominal interest rates at around 5%, while real interest rates were down to levels not seen for several decades. Government deficits were low, culminating in an overall deficit for the Euro area of 0.6% in 2007, the lowest in several decades. Indeed ten out of the fifteen Euro-area countries either recorded a budget surplus in 2007 or were very close to balance. Growth over the period had been  2.1%, not far short of the U.S. 2.6%. A record of 16 million jobs had been created, while unemployment had fallen to about 7% of the labour force. Not least, the late developing countries of Spain and Portugal had managed to catch-up on, and Ireland to overtake, the Euro area’s average per capita income, while membership of the Euro continued to expand. Intra-Euro area trade and investment had grown. The decline in risk premia resulting from the creation of the Euro had also boosted capital formation, and labour productivity. Financial market integration had accelerated, while the creation of the Euro had made the Euro area a pole of stability, helping to shield the Euro-area economy against external shocks. On a global scale, the growing status of Europe as an actor on the world stage was seen as measurable in the increased international use of use of the Euro.

It is clear,though, that the critics of the single currency were correct in their assessment of the challenges required to make union work.[38] Their argument was simply that hitching disparate national economies together in a currency union, and without a fiscal federal budget, [39] was an extremely hazardous undertaking to say the least.[40] Had implementing the commitment to a single currency been first priority, all member states would have had to liberalize labour alongside product and capital markets, flanked by the creation of Europe-wide welfare and social policies. But the EU’s  Lisbon strategy, launched in 2000 to make the EU “the most competitive and dynamic knowledge-based economy in the world”, was not about liberalization so much as protecting national social and welfare policies against “social dumping”-in other words against freer labour markets.[41] Member states duly went their own ways. Competition between national labour markets rather than integration across them was the pattern. Intra-European labour market mobility remained marginal,[42] and labour market institutions and attitudes remained national. This was particularly the case of Germany, where business, as we have seen, ground down unit labour costs; the government and unions kept wage rises moderate; and  western German taxpayers transferred the equivalent of 6% of gdp to eastern Germany in fulfillment of Chancellor Kohl’s programme to export West Germany’s social market policies to the eastern Länder.  German taxpayers were not prepared to repeat the experience when France and the southern European countries began to talk about EU-wide fiscal transfers in 2009, as the Euro crisis gathered pace.[43]

Far from converging, the economies within the Euro diverged. Every indicator of competitiveness from unit labour costs, to innovation, investment in R&D, and market friendliness showed that the gap opening up between northern and southern Europe was wide and getting deeper. France occupied an uncomfortable position in between. As late developers, and with their own specific histories and political cultures, the southern countries and France did not have the infrastructure of training; the density of small and medium businesses; the expanding technology hubs and the close ties between corporations, research institutes, national and local governments and banks that characterized Germany, The Netherlands, Finland, Austria as Euro members- and Sweden, outside it. The results showed up in the huge, and growing northern European current account surplus , equivalent to the total current account deficit of France and the Mediterranean countries.

With interest rates lowered by Trichet’s ECB between 2003 and 2006, and the flow of capital southwards via EU banks, demand in the southern countries and Ireland was stimulated by private sector endebtedness and by expansionary government policies, with Italy a notable exception. By 2008, only Germany and Italy had primary net positive government balances. Here was another area where expectations had been flouted. The growth and stability pact, imposed by Germany in 1996 in the hope of keeping Italy out of the Euro, was flouted in spirit before the currency was a year old. Commissioner Prodi declared that the pact was “stupid”.[44] The Commission then lectured Ireland and Portugal, two small and peripheral member states, on allowing their deficits to exceed the 3% GDP rule. Ireland was let off the hook, but Portugal was obliged to cut its government deficit. Thereupon, Germany and France, in November 2003, suspended the EU’s budget rules by rebuffing a call by the Commission to bring their deficits back under the limit. Clearly, rules designed for Italy, and applicable to small countries, could not be applied to France and Germany.

Meanwhile, northern gains in intra-Euro market share were financed by capital ouflows, with German Landesbanken in particular sourcing low cost funds in the Euro bond markets, and investing them in the U.S. mortgage market and in southern European construction and infrastructure projects.[45]  The BIS calculated that German banks invested over 1 trillion Euros in non-German bonds of euro area countries since the fixing of exchange rates in 1996, yielding an estimated 200 billion Euros of profits sum equivalent to the total profits of German banks over the period.[46] Indeed, as had been expected, the creation of the Euro stimulated cross-border lending, the growth of 16 larger banking groups holding over 25% of their assets outside their home countries, and a boom in euro -denominated private-sector bonds, and to a lesser extent of equity markets. The result though was that banks from the core European countries, including France, were highly exposed to the economies of the periphery when the downturn hit in the winter and spring of 2008-09.

The first signs of things going wrong in the capital markets came with the peak of the housing market in the U.S. in 2007 and a series of bank losses on both sides of the Atlantic. Governments across the world, and in the EU, responded to the crisis with policy made on the hoof. As the report, penned by the senior French civil servant, Jacques de Larosière later concluded, national bank supervisors failed to share their information with others, “leading to an erosion of mutual trust”[47]. Germany led the way in a national  bailout of IKB-the Deutsche Industrie Bank. The U.K. government nationalized Northern Rock; the German government came to the rescue of a series of Landesbanken; the Irish government announced  it would guarantee the deposits of Irish savers for its 6 big banks, prompting Chancellor Merkel to state that she would not bail out Irish banks. By the time that the G7 heads of government met in September 22, 2008 in London a week after the Lehman collapse , the bank crisis was turning into a government debt crisis, as government balance sheets deteriorated and risk spreads rose on the markets.

In the scramble, treaties were flouted, much as de Gaulle had once declared: “treaties are like roses and young girls; hélas, they last as long as they last”.  The bailouts arguably infringed the terms of the EU’s internal market, while the provision of market liquidity by the ECB arguably violated its own charter to give sole priority to price stability. With inflation on the rise, the ECB jacked up  interest rates in September, and then  lowered them again in October. The ECB went further in its generous reading of its charter by a gentleman’s agreement in early 2009 that banks would not use the liquidity to buy government bonds, and then re-sell them.  The Dutch proposed the creation of a European Monetary Fund to get around the problem of ECB provision of liquidity to help government finances as they became burdened by the fallout from the crash. German Finance Minister Steinbruch said Nein.[48]  Germany then said Nein to demands that the government boost domestic demand; when President Sarkozy proposed the EU develop its “economic government”, shorthand for an EU fiscal union and the issue of eurobonds, it was greeted by icy silence in Berlin. For the German government, the proposal marked the beginning of a conflict over the model which would dominate the European economy in the future: Germany’s own social market economy, or French dirigisme. [49]

The Greek drama then exploded on the EU in October 2009, when the newly elected PASOK government revealed that the Greek deficit was not 3.7% gdp as previously reported, but 6%, and finally near 16% gdp. It soon transpired that Goldman Sachs had helped the Greek government cook its books in order to enter the Euro in 2001,[50]using derivatives to window dress public accounts, a service also provided for Italy.[51] Furthermore, France then announced that it would not be reducing its debt below the 3% limit until 2012. In January 2010, Jürgen Stark, a member of the ECB executive committee, made public his view that the problems of Greece were created in house. [52] The implication was that if Greece should be unable to meet its soaring debts, it should default.

As the UK Conservative party leader, William Hague, had presciently diagnosed in a 1998 speech in Fontainebleau, near Paris, the Euro  was “a burning building with no exits”. [53]

In the process of firefighting, the EU leaders who had promoted the single currency, forfeited their credibility. [54] Net trust in EU institutions-the ECB , the Commission and Parliament-fell off drastically between 2008-2011. The same pattern of net fall off in trust for EU institutions holds in the major Euro member states of Germany, France and Italy. A more conservative orientation in German domestic politics, particularly regarding fiscal consolidation and labour market reforms, was heralded by the formation of a centre-right government, following the general elections of September 2009. By the time of the first Greek bailout in May 2010, German skepticism about the Euro and its institutions was on the rise.[55] Two thirds of French people considered the Euro was damaging the average French family’s standards of living and purchasing power.[56] “The benefits of Eurozone exit”, wrote three influential French intellectuals,”would be immense”.[57] By September 2012, two thirds of Germans considered they would be better off with the DM.[58]


Perpetual crisis.

From the first alarms about the state of Europe’s banks in autumn 2007, until the first bailout of Greece in May 2010, nineteen months elapsed; [59] the second rescue plan occurred in July 2011, after fifteen months; four months then passed until the next crisis of October 2011; one month went by until the next bailout in December 2011; meanwhile, the ECB was tip-toeing to monetary easing, arguably in contravention of its founding mandate; Greek debt continued to mount, with spreads widening on Spanish and Italian bonds; in May, 2012, François Hollande won the French Presidential elections of May 2012 on an incredible programme for economic growth in Europe, prompting the markets to ask whether France was reformable. [60]

The messy political response to the burgeoning Greek crisis spooked the markets during the nineteen months elapsing between the outbreak of the bank crisis and the Greek bailout of May 2010. The widening spreads between Greek bonds and German bonds signaled that global investors realized that the zero risk premia on credit across the Euro had been a fiction, and that if there was indeed no foreign exchange risk, there was a country risk. In other words, the Euro was a composite product, much like the composite financial products which financial engineers had sliced and diced to sell on to gullible buyers in North America and in Europe during the boom years of 2002-2007. Its value was not just a function of the stability-orientation of the ECB, and the undoubted benefits to Euro citizens of their currency. It was also a function of the relative capabilities of each country’s business system, the output of which was recorded in market data. And as the data revealed these had not converged, but diverged lay bare the fundamental structural fault lines of the Euro area.

There were three related requirements to restore confidence in the Eurozone’s ability to deal with the financial crisis: debt sustainability; the avoidance of contagion; and moral hazard. [61] There was no lack of proposals to deal with them.

Four German professors wrote in the Financial Times, suggesting that Greece exit the Euro, and recreate the drachma. [62] Merkel suggested as much, but Trichet –reflecting the idea of the EU as a “community of destiny”- pointed out that exit was “legally impossible”. [63] An exit also could have raised doubts about the  ability of other Mediterranean countries’ ability to finance their deficits, given the close link between the widening spreads on their bonds and their current account imbalances, as foreign creditors took fright at the prospect of default or exit.[64] Up to 50% of Italian and Spanish debt by 2010 was held by foreign creditors. [65] “Grexit”, too, would set a precedent for German exit (Gerxit), an option which had already been publicly aired.[66] Had Germany exited from the Euro, a huge revaluation of the hypothetical currency, would have dealt a major shock to German export industry,[67] but it would have given the Bundesbank the independence which it had been France’s prime objective since 1983 at the latest, to collectivize. It would also have returned  to the Bundesbank the foreign exchange reserves, now in the hands of the ECB. Those reserves would then be available for German use on global markets, rather than placed at the disposal of all Euro members. Grexit, in short, would have left the way open to repatriation of monetary and exchange rate policy. It was binned.

A second option would have been a Greek default. Such a line of action would definitely have been compatible with the no bailout commitment in the Maastricht Treaty. It would have been compatible with the mood of German public opinion that lax policies in Euro member states should not oblige German tax payers to pay out. It was also arguable that the precedent of southern member states being bailed out, would create moral hazard—the notion that being rewarded for laxity by bailout they would not change behavior, but come back for more. On the other hand, Berlin was very concerned at the exposure of German banks to the Mediterranean countries and Ireland.(See box). Berlin had created a stabilization fund to bailout German banks at home in 2008;[68] by 2010, the FSMA had granted a total of €63.73 billion worth of guarantees, extended €29.28 billion worth of capital measures and, by establishing two resolution agencies, claimed a successful contribution to stabilising the German financial market. But bailing out German banks for their exposure to the Mediterranean countries would have been  a step too far. Berlin found Paris, whose banks were also exposed, not keen on Greek default. The option was disguarded.

A third option was for the ECB to buy the bonds of  Mediterranean governments. A gentleman’s agreement had already been concluded in 2009 for the ECB to extend loans to banks who would then buy government paper, on the agreement not to sell the paper back on to the market. This was already an infringement of the spirit of the Treaty, which had spelt out quite clearly that the sole task of the ECB was price stability, and that it was the responsibility of governments alone to manage their fiscal affairs. Nonetheless, with the Greek government facing short term liquidity problems to turn over its debt on the market, and pressure from the US administration to avoid contagion spreading from European banks to the US banking system, the EU agreed in May 2010 to have the ECB administer a Securities Market Programme(SMP), which was nothing else than a bond purchase arrangement. But it was a programme which did not receive eager consent from Bundesbank members of the ECB, on Treaty grounds, and in particular that such measures contributed to the decline in the German public’s trust in the currency. Nonetheless, the measure was taken. German taxpayer’s money would now be ultimately at risk. The SMP put the Euro countries on the path towards what the German public feared most: a TransferUnion, where Germany taxpayers would be called on to bailout the Mediterranean countries with total debts twice those of the German economy, and after two decades when West German taxpayers had contributed an annual transfer to the new Bundesländer equivalent to 6% gdp.  As it was, the SMP pulled the ECB into  a grey area, quasi legal, half improvisation.

Fourth, France as ever wanted an economic government for Europe, replete with its own fiscal resources, and with powers to issue European bonds, which would be backed by the combined credit of the Eurozone members. In Sarkozy’s words, he proposed to Merkel that the member states should put money on the table, and worry about the details later.[69] From a French perspective, with the country’s highly inflexible labour market regulations, a Keynesian policy framework for Euro area economies was entirely consistent with the very high degree of member states’ labour market rigidities.[70] As Keynes had argued, if unemployment was high and households and corporations were saving, governments had  to spend more than they received in tax income in order to maintain the economy at a near full employment equilibrium. A Keynesian expansionary policy for the Euro area economy would require an active ECB, buying and selling bonds on the market and acting as a lender of last resort, as the Federal Reserve and the Bank of England were doing. But the German model of a social market economy was not Keynesian, at least in theory. Reflecting Bundesbank preferences, the Maastricht Treaty had excluded any reference to economic government, despite mention of a substantial EU fiscal arm in the 1970 Werner Plan and French insistence in 1990. So the only possible instrument available to the EU to offset the downturn in economic activity was the ECB, through countercyclical monetary policy and acting as a lender of last resort. This would also have gone beyond the Treaty’s terms, but it would have brought down interest rates, helped massively to defuse speculation against the Mediterranean and Irish governments’ paper, curtailed the rise in debt, and opened the prospect for a debt restructuring—in others words, “haircuts” or private sector losses on bonds, and an extension of the payback periods.  It would also have helped to return the European economy to growth. This was a step too far, at least at the time. In any case, both Merkel and Trichet opposed any idea of the ECB dealing directly with the markets.[71]

So the option on which France and Germany could agree was to squeeze the Greeks.[72] In May 2010, the EU, the ECB, the IMF and the individually contributing governments cobbled together a package, amounting to E110 billion, spread over three years. The fragile Greek economy went into a tail spin. By spring 2011, it was clear that Greece could not fulfill the terms, so a second plan for Greece was agreed in July, involving private investors being told they would have to take losses, tighter surveillance by EU institutions of Euro area member states public finances, and a tougher reform package for Greece. By this time, the outlines of German strategy had evolved clearly in favour of: fiscal rectitude; wage compression in deficit countries; and measures to improve national competitiveness. What had been good for Germany, in short, would be good for Europe.

The third crisis opened almost immediately as it became clear that stricter macro-policies worsened the plight of Mediterranean country banks, faced by a combination of widening spreads on Spanish and Italian bonds; IMF requests for European banks to recapitalize; and an acceleration in sales of peripheral country bonds by northern European and US institutions. The funds moved to Germany as a safe haven, driving down interest rates there, fragmenting the European financial space further. As Prime Minister Papandreou, and Prime Minister Berlusconi objected to the tightening conditions on their national economies, the ECB, with the backing of Merkel and Sarkozy, arranged to have them politically defenestrated. [73]  Mario Monti, the former European Commissioner took over the premiership in Rome, and Lucas Papademos, the former vice-president of the ECB, formed an interim government in Athens. Meanwhile, Spanish and Italian borrowing costs were rising sharply, and in December the ECB launched a liquidity programme to provide temporary relief to the bond markets, prompting a short lived equity rally. By  early summer 2012, spreads were again widening in the light of the continued deterioration in Spain’s finances, and the signs of mounting demands for Catalan independence from Madrid. In September, the ECB announced that it would intervene directly on bond markets in order to keep market speculation in bounds.

In May, the French electorate voted for François Hollande as President, in place of Sarkozy, who Merkel had overtly favoured. Five years into the crisis, the Franco-German tandem was seriously impaired. At the end of 2012, Euro area finance ministers approved another rescue package for Greece, to keep the debt-saddled economy afloat, in return for a further austerity package. It was estimated that as a result of the package the country’s net debt would fall by Euro 20 billion, a fine result but for the fact that net external debt, already at 149% gdp in 2008, when it was heading towards 180% gdp by 2013, [74] had reached 170% gdp by 2010, and was heading to 200% gdp by 2013.[75] The IMF showed Greece’s net external debt fall below 120% gdp by 2020, without identifying how this was to be achieved on the back of a miniscule manufacturing sector. Unemployment was rising at 24%, with the economy one quarter smaller than in 2008.The European sovereign debt and banking crisis was clearly chronic.


Germany casts aside the veil.

The salient feature of the events of 2007 to 2012 was Germany’s assertion of  its position as the pivotal power in Europe. The novelty lies not in the fact of German primacy, but in the assertion. At the time of its re-unification in 1990, Germany held to its post-1949 European federalist style, and adopted a modest tone in order to disguise its leadership position in the heart of Europe. As Chancellor Kohl reminisced, his predecessor, the first postwar German Chancellor, Konrad Adenauer, counseled that in dealing with France, he should always bow once to the German and twice to the French flag.[76]  By 2010 Chancellor Merkel had few such inhibitions in her insistence on the German way forward for Europe. But France, weakened economically yet with formidable diplomatic leverage in the EU institutions,  still managed to push its own preferences. For the fact is that the Euro crisis could have been solved by one of two ways from the start: Greece could have been allowed to default; or Germany could have agreed to the issuance of Eurobonds, backed by the credit of all participants states. Under such an initiative, it is reasonable to consider the counter-factual story that Greece, equal to a modest 2% of the huge EU economy, would have been able to finance its debts at much lower interest rates. It would have enjoyed the collective credit of the world’s prime market place. Such Europe-wide solidarity was definitely not available when requested.

The first reason for this had to do with the limits to European politics. Simply, the sovereign member states were not prepared to hand over sovereignty to EU institutions, as if they were turkey’s voting for Christmas. Chancellor Kohl had hoped to flank the newly minted ECB with a political dimension, ceding more powers to EU insttitutions. Political development of EU powers was said to be  all the more urgent as membership expanded from 12 to 15, and then to  28. As German Foreign Minister Joschka Fischer argued in May 2000, in order to master the tensions between western continental monetary union and eastern enlargement, the EU had to become a European federation of independent states. [77] “A tension, he warned, has emerged between the communitarization of the economy and the currency, on the one hand, and the lack of political and democratic structures, on the other, a tension that might lead to crises within the EU if we do not take productive steps to eliminate the deficits in political integration and democracy, thus completing the process of integration”. Negotiations to modify EU institutions began in 2001. After a lengthy process of inter-governmental conferences, and its rejection three times by the French, Dutch, and Irish voters,  the Lisbon Treaty became law on December 1, 2009,[78] after a yes vote in a second referendum in the Irish Republic. While extending the legal powers of EU institutions, the Treaty formalized the Euro Group of finance ministers, which had been meeting since the currency’s inception.

But Lisbon was far from creating a federal state. Germany’s Constitutional Court  confirmed the compatibility of the Treaty with the Basic Law. But the Court made the crucial statement that the EU was “an association of sovereign national states” (Staatenverbund), and not a federal state (Bundestaat). If another intergovernmental conference were to be called to create a European democratic polity, Germany’s “accession to a European federal state would require the creation of a new constitution”.[79] Meanwhile, fiscal powers could not be shared, a position that was confirmed in the Constitutional Court’s judgement on the Greek bailout. [80] In short, Germany’s supreme legal instance was declaring that German policy in the EU had to be predicated on what Charles de Gaulle used to call “L’Europe des Etats”. As Paul Kirchhof, a former constitutional judge, declared: “The European Union is a contract between sovereign states and as such a political space of secondary rank”. He added: “There never will be a European state as long as the German constitution has life”.[81]

Ending the Federal Republic as a sovereign state, in other words, would have to be an open political process. The Court did not exclude the move to a federal European Union; it just pointed out that the bar of achieving it was very high. Rather, handing fiscal powers to the EU as it was would  eviscerate national democracy-the accusation thrown at the EU leadership over the political de-fenestrations of the Greek and Italian premiers in late 2011. If the constitutional process were to be re-launched—the appetite for doing so in Brussels was absent, after the marathon of negotiations leading to the Lisbon Treaty- national budgetary powers could be handed eventually to EU institutions. But they, and their powers, were yet to be defined, and the mandate they received could only pass the democratic test if the peoples of Europe were to vote on a non-national basis, with all European citizens having an equal weighting as one citizen, one vote. This was not on the cards. In effect, the Court was calling a halt to Jean Monnet’s method of negotiating European integration by selected  élites behind closed doors. Germany was now both a champion of a “Europe of the states”, as Charles de Gaulle had been in the 1960s, and of a European federal project for the future.

This was an awkward spot to occupy. On the one hand, the instinctive response of the member states was to look after their own first, and the devil take the hindmost. Germany was no exception. In fact, it was widely accused of taking the lead. The strains placed by the Euro crisis on the internal market had been  already visible by the surge in state aid to bail out national banks, with Germany prominently to the fore;  the joint decision not to allow sovereign default for fear of contagion; the prevarications about the operations of the agreed bailout funds, inspired by German, Dutch and Finnish hostility to their taxpayers being held to account for southern debts and deficits; and by the de facto fragmentation in the internal market recorded by the spreads in interest rates between core and periphery countries. Markets observed, too, the gap between Chancellor Merkel’s repeated statements that Germany was committed to the Euro, and its actions to impose retrenchment on deficit countries during an already deep recession. By contrast, domestic opponents to Euro area fiscal and banking union accused her of placing Germany on the slippery slope to a “Transferunion”. “ If everybody”, Han-Olaf Henkel, former head of the Federation of German Industries (BDI) wrote, [82]  “is responsible for everybody’s debts, no one is”. Unwilling to be accused by EU leaders of ditching the Euro, or by domestic opponents of the Euro for not defending German interests more vigorously, Merkel opted to locate the dilemmas of her position between a present of minimum action and a necessarily undetermined  future. [83] In other words, Merkel kept Germany’s options open.

On the other hand, European federal rhetoric served to promote some common action. The  combination of a  deterioration in both European bank finances and sovereign credit prompted action for stronger EU-wide regulation of financial services, in line with the conclusions of the de Larosière committee for powerful new market regulatory committees, one set for banks, insurance and capital markets, and the other for government finances. deciding by qualified majority voting,  In 2011, The European System of Financial Supervisors replaced the existing bank, insurance and capital market committees, with European supervisory authorities for all three, and a European Systemic Risk Board (ESRB) under the responsibility of the ECB. They were to act as a hub and spoke network of EU and national bodies, rather than the full powers initially envisaged by the de Larosière report.[84] For government finances, a process was instituted to oversee budgets. In both cases, national sensitivities limited the impact. This was most visible in the running battles over the monies available for the bailout funds, the terms on which the funds were allocated, how they were to proceed, and who would be held responsible for the liabilities. In November 2012, the Commission unveiled its plan for a fundamental overhaul of how the Euro area was to be structured, including the prospect of setting up a common budget for the Euro area, and issuing joint debt in the years ahead. As President Barroso was quoted a saying: “The euro area must be able to integrate quicker and deeper than the EU at large.”[85]  In the longer term, he said, all this would require political union. As experience had shown, this was not for tomorrow. Meanwhile, proposing new institutional arrangements provided no immediate answer to the ongoing Euro crisis.

Proposing deeper integration, though, opened up the old split between the continent and the UK. As Europe’s prime financial market place, the City of London proved an easy target for continental hostility to international finance-a hostility which was partly overcome by Prime Minister Brown’s decision to ally with President Sarkozy for expansionary EU policies to offset the downturn. Brown also committed UK taxpayers money as a contribution to bailouts. But just as the September 2009 elections in Germany led to the creation of a more Euro-skeptic coalition government, so the May 2010 elections in the UK  led to a Conservative Liberal coalition, where the new Conservative intake of MPs were notably more euroskeptic than in the past. Prime Minister Cameron withdrew UK support for EU bailouts, but his pro-EU  Liberal Democrat partners insisted on the UK negotiating its case from within the new EU regulatory institutions and as an active participant in the internal market. Like Merkel, Cameron located his moment of choice between domestic opponents to the direction of EU policy, and EU complaints about UK as an “awkward partner”[86], in the future. The UK would champion the EU’s internal market, but reserve its options with regard to how Europe would develop.

This was France’s opportunity. Negotiations during the crisis had shown that Paris’ influence in Berlin was no longer what it had been. France’s traditional allies to pressure Germany for growth were of little use: Merkel turned a tin ear to the Obama administration’s calls for stimulus, [87]  while Madrid and Rome were trapped by Germany’s hostility to fund their deficits. The same logic applied to France. As Volker Kauder, parliamentary leader of the German Christian Democrats, commented on President Hollande’s proposed growth strategy: ”Germany is not here to finance French election promises”. [88]  Perhaps, though, France could forge an alliance with Germany against the UK.  This formula had worked nicely in the past. Once again, the UK seemed an easy target. Creating an anti-UK alliance over financial regulation could prove good for Paris as a financial centre, while the UK’s “light hand” regulation of the City had been widely blamed in the EU as a prime cause of the crash. The “Anglo-Saxon” press might label France as Europe’s sick man, [89]  but the UK   was neither a member of the Eurogroup nor of the ECB. That was where decisions could be made, without UK participation, with a view to strip London of its status as Europe’s main financial hub, by bringing Euro business on shore and under ECB control.[90]

But Germany was not keen on marginalizing the UK, a significant advocate of open markets for the EU. Nor were German interests so evidently in the federal camp, whatever Merkel’s rhetoric. [91]  A federal Europe implied fiscal sharing of tax resources between rich and poorer member states, with Germany in a minority. The EU, though, was not a federal structure, and Germany was definitely not keen on becoming the EU’s milch cow. In the script written in Berlin for the EU since the outbreak of the crisis it was fiscal reprobates, not chronic surplus countries, which had to be punished. That required national budget discipline and   a new Pact of Growth and Stability. The European Fiscal Compact, agreed on in December 2011 by 25 of the member states, minus Czeck and the UK, would enter into force in January 2013. Solidarity would not be measured by transfers from the rich to the poorer, but by each member state being held responsible to the new EU institutional instances for their own public finances. There would also be a pact for competitiveness, involving wage moderation, cutbacks on benefits, and later retirement.

If Germany was such a champion of state rights and duties as the foundation for a viable EU, did this conceal a temptation for Germany to go-it-alone? There was definitely circumstancial evidence in favour of the argument.  The Constitutional Court had said no to a federal Europe, not without a new German constitution. The Bundesbank’s response to Germany being sucked into a TransferUnion came with the resignation of Axel Weber and Jürgen Stark, two German members of the ECB Governing Council, over the direction of ECB policy regarding bailouts and quantititive easing. Merkel’s actions too raised the question of whether it was not German policy to squeeze the periphery out of the Euro.[92] In addition, German public opinion was adamant that none of their taxes should fund delinquent EU members states, while German business leaders worried, as they had reason to,  that German savings were needed to equip its companies to compete on world markets, not on subsidizing current consumption in the European periphery. [93]

What was more, Germany had acquired a habit of saying Nein to the western allies. Chancellor Schröder had said Nein under any circumstances to the US over the impending Iraq war in 2002, and won the general elections as a reward; [94] Merkel said Nein to the bailouts, and Nein to the Obama administration’s advocacy of growth;  the Chancellor did not consult Paris when in May 2011 she decided to ditch nuclear energy in response to the Fukushima disaster in Japan;[95] contemporaneously,  Merkel aligned Germany’s vote, not with France and the UK, but with China, Russia, India and Brazil over the invasion of Libya. [96]  In May, 2011, Premier Wen Jiabao signaled China’s view of Germany as Europe’s hegemon by holding a joint cabinet meeting with the German government in Berlin. Germany’s business with China was fast approximating that with France, and would rapidly exceed it in the coming decade. The former head of the BDI, Hans-Olf Henkel, advocated a breakaway currency with Austria, Finland, Germany and The Netherlands as members, and leave the Euro to be led by France.

The concern that Germany was flirting with an Alleingang was overdone, but significant. It was overdone for a number of crucial reasons which bound the country into the European and Atlantic fetters which Konrad Adenauer had chosen in 1948-49. China and the emerging markets were of growing significance, but German exports to the Euro-area were 42% of the total, while the European Union took  two thirds of its  exports. The EU economy was the world’s prime emporium. Furthermore, as the opponents of the EU bailouts pointed out, the Bundesbank was building up huge liabilities to the ECB and other national central banks.[97] If the Euro were to collapse their calculation was that Germany would have to write off 20% of its gdp, not counting the cost of a revalued mark, which the UBS calculated could rise by as much as 50% over the current Euro exchange rate. [98] Furthermore, Germany’s Bundestag remained highly critical of the domestic political evolution in Russia and China, as were its European partners.

But the temptation for a German Alleingang , or at least for German dominance in an EU modeled along the lines of German preferences, was definitely noted in Paris, reinforcing French determination to make the Euro crisis the opportunity to cement its post-war policy of binding Germany into a French-led coalition. As Hans-Olaf Henkel lamented, as did many of the other German opponents to the Euro’s evolution, “more and more Germans are discovering that Europe may speak German now but it acts French”.[99]  The fear was that from EU funds to ECB monetary easing, it was just a matter of time before the bill for the bailouts landed on Merkel’s desk. Hence, the insistence on “haircuts” for institutions that had invested light heartedly in southern Europe during the boom years. To avoid the bill for bailouts landing on the Chancellor’s desk required her to tread a very narrow path: if the bill were to land on her desk, one option would be for her to opt for a federal Europe of sovereign states, so that other rich countries could share the pain. But in a federal Europe, the poorer states of southern and central eastern Europe could be expected to clamour for solidarity transfers from the rich. That would prolong Germany’s post-1949 status as Europayer indefinitely. It would be highly unpopular; definitely from the perspective of German taxpayers and business, it would be  bad for the German economy; and it would be bad for the poorer countries to become drugged on EU handouts, originating from the rich northern countries.

Merkel’s policies to date are thus a series of strenuous efforts to accomplish three tasks: preserve the EU; protect the German economy; convert other EU member states to a German type liberal and social market economy. It is a very tall order.

Interim conclusions on an ongoing saga.

A number of key conclusions may be reached on an unfinished saga: first, the EU mechanisms continues to operate. But everywhere they turn, the demands of the sovereign states, and even more of their peoples, are demanding that national governments be held accountable to their electorates. Second, as Jean-Claude Trichet observed, the Europeans are learning the hard way that to form a single currency you have not only to have a monetary union but also an effective government of the economic union.[100] That effective government, Germany is saying, and herein lies the novelty for the European Union,  can only be a Europe of the states.  Third, Germany’s behaviour during the crisis indicates that the country has finally recovered from the world war. War guilt is no longer sufficient for France to play upon. Fourth, Germany’s clear national interest is to preserve the EU status quo, with modest changes short of a federal Europe. Fifth, that means calling a halt to the permanent revolution of “ever closer union”, involving the transfer of powers from member states to the EU. Sixth, the two key countries now favouring a Europe of the states within a modest EU are Germany and the UK. To join the inner group of the emerging new EU of sovereign states, France has to liberalize its economy. Possibly, that prospect was put back by the election to the French Presidency of François Hollande in May 2012.

Meanwhile, it remains true that the crisis could have been resolved as soon as it broke, and all the pain and anguish avoided. But it was not, and for multiple reasons. France and Germany were not in agreement about the EU’s future shape: France wanted a Keynesian EU; Germany most definitely did not. The political crisis  proved highly damaging for all, and could still derail the European project. The small, poor powers were squeezed; the major and the rich powers took over; the Commission was sidelined; the ECB’s autonomy was put in question on account of the SMP; the Maastricht Treaty’s no bailout clause was infringed; contagion was not contained, as speculation against Greek, Portugese, Spanish and Italian  and Irish bonds played out; Greece’s plight though served as a warning to other governments to  retrench, despite the downturn. The policy of austerity in a downturn was rightly identified as German driven. National resentments grew, and the embers of old wars were rekindled. Not least, the combination of fiscal retrenchment and wage compression set Mediterranean net debts on a sharp upward trajectory. After all the years of anguish, moral hazard had not been contained; German and northern taxpayers were still on the hook. It is not impossible that the German, Dutch and Finnish electorates would opt against the Euro, if paying the price of staying in were higher than the price of exit.

As the wayfarer in Ireland heard in reply to his question about what direction he had to get to his destination, “I wouldn’t have started from here”. But that is where the Euro project has placed the European publics. It is too early to assert they will take the way their unpopular élites have indicated.

London and Fontainebleau, December 2012.

[1] For an overview of the economic literature on monetary union, Barry Eichengreen,”European Monetary Union”,Journal of Economic Literature,Vol.XXX1 (September  1993).pp.1321-1357. His conclusion is that the rationale for EMU has to be found in political economy, as economic arguments for and against are inconclusive. The political economy literature on the Euro is extensive: There is a large literature on the theme of monetary union. Authors place different weight on contributing factors from the impact of global financial markets on intra-European exchange rates; domestic politics; interdependence within Europe; and Germany’s place in post-war Europe. My take on the story –that all these perspectives point to the pivotal role of Germany– is spelt out in my chapter with Marcello de Cecco, “The politics and diplomacy of monetary union: 1985-1991”, in ed. Jonathan Story,(1993)  The New Europe: Politics, Government and Economy since 1945, Oxford, Blackwell. See also  Loukas Tsoukalis, (1977), The Politics and Economics of European Monetary Integration, London, Allen and Unwin; Peter Ludlow, (1982) The Making of the European Monetary System, London, Butterworths; Haig Simonian, (1985)The Privileged Partnership: Franco-German Relations in the European Community, 1969-1984,Oxford University Press; Eric Aeschimann, Pascal Riche (1996) La Guerre de Sept Ans: Histoire secrète du franc fort 1989-1996, Paris, Calmann-Levy; Bernard Connolly, (1996) The Rotten Heart of Europe: The Dirty War for Europe’s Money, London, Farrar Straus & Giroux ; Dieter Balkhausen,.(1992) Gutes Geld und schlechte Politik, Düsseldorff, Capital; Michael Baun, “The Maastricht Treaty as High Politics: Germany, France and European Integration”, Political Science Quarterly, 110:4 (1995-6) pp.605-24; Charles Grant, Delors: Inside the House that Jacques Built, London, 1990; Kenneth  Dyson, (1994) Elusive Union: The Process of Economic and Monetary Union in Europe(London); Kenneth Dyson, Kevin Featherstone, (1999) The Road to Maastricht: Negotiating Economic and Monetary Union, Oxford University Press; Andrew Moravcsik, (1998) The Choice for Europe: Social Purpose and State Power from Messina to Maastricht, Cornell University Press, New York.

[2] Simon Bulmer, William Paterson, The Federal Republic of Germany and The European Community. Allen & Unwin, 1987; Simon Bulmer, Charlie Jeffery, William Paterson, Germany’s European Diplomacy: Shaping the Regional Milieu ,

(Issues in German Politics), Manchester University Press, 2000.

[3] Edward A. Kolodziej, French International Policy under de Gaulle and Pompidou: The Politics of Grandeur (1974). Jean Lacouture, De Gaulle: The Ruler 1945–1970 (1993); Jean Monnet: The First Statesman of Interdependence by Francois Duchene (1994.)

[4] Alan S. Milward,. The Reconstruction of Western Europe 1945-51 (Berkeley: University of California Press, 2006)

[5] Wilhelm Nölling, cited in Bernard Connally, The Rotten Heart of Europe: The Dirty War for Europe’s Money, London, Faber and Faber, 1995.p.98.

[6] EC Commission(1970)”Economic and Monetary Union in the Community”(Werner Report),Bulletin of the European Communities.Supplement No.7.

[7] Lukas Tsoukalis, Politics and Economics of European Monetary Integration, London, harper Collins, 1977.

[8]  Peter Ludlow, The Making of the European Monetary System, London, Butterworths,1 982.

[9]  This condition had been laid down in no uncertain terms by Bundesbank Governor Emminger.  In his letter to the German government in November 1978, Bundesbank Governor Emminger, indicated that Bonn and Frankfurt were agreed that a “definitive” regulation for the EMS would require a change in the Rome Treaty, and that a crucial aspect of  Germany’s stability policy was to place “a limit on the intervention responsibilities “of the Bundesbank.(Emminger’s italics).In Otmar Emminger, D-Mark,Dollar Währungs-krisen, Errinerungen eines ehemaligen Bundesbank-präsidenten, Stuttgart, Deutsche Verlag, 1986.pp.361-2.(Authors’ translation).

[10] A prime motive was to ease with weight of the external debt, “Le poids du service de la dette éxtérieure interdit pour longtemps à la France une politique de relance”, Le Monde, November 15, 1983; and also to develop Paris as a major capital market, Dov Zerah, Le système financier français. Dix ans de mutations. Documentation Française. 1993.p.125.

[11] Ministère de l’Economie, des Finances et du Budget, Le Livre Blanc sur la Réforme du Financement de l’Economie, March 1986

[12] Dov Zerah, (1993) Le Système Financier Français: Dix Ans de Mutations, Paris: Documentation Française,.

[13] The expression is that of Olivier Pastré, consultant to the Trésor: “Pastré: le reveil des ZINvestisseurs”, La Tribune de l’Expansion, September 7, 1992.

[14] Pour Une Nouvelle Politique Sociale en Europe. Avant-propos de M.Jacques Delors. Paris, Economica,1984.

[15]Les orientations de la Commission des Communautés Européennes” Futuribles,March,1985.pp.3-18 .

[16] See Finance Minister Balladur’s memorandum, quoted in English translation in the EC Monetary Committee of 29 April 1988 in Daniel Gros and  Neils Thygesen, European Monetary Integration: From the European Monetary System to European Monetary Integration, London, Longman, 1992. p312.

[17] Hans Dietrich Genscher,”Die Rolle der Bundesrepublik Deutschland bei der Vollendung des Europäischen Währungssystem“, Ergebnisse einer Fachtagung, Strategien und Ergebnisse für die Zukunft Europas, Gütersloh: Bertelsmann Stiftung, 1989, pp. 13-20.

[18] The Bundesbank declared its terms to be “non-negotiable » : “EG-Länder werden auf Gedeih und Verderb miteinander verbunden”,Frankfurter Allgemeine Zeitung, September 26, 1990.

[19] By adopting a single currency, “France,Mitterrand stated, will exert more influence in an ECB than it does today over the DM”Aeschimann,Riché.p.91.

[20]Le Monde, 5 September, 1992.

[21] “L’Europe selon Chirac”Le Monde, March 25,1996. “A la Banque centrale européenne, que nous avons voulu forte et indépendante, il reviendra de garantir la solidité future de la monnaie européenne. Mais c’est au Conseil des Ministres, institution répresentative des états, qu’il appartiendra de définir les orientations de la politique economique de l’Union, à l’unanimité chaque fois que c’est l’essentiel”.

[22] Timothy Garton Ash, In Europe’s Name: Germany and the Divided Continent, Random House, 1993.

[23]  Romano Prodi, Interviews with the Financial Times, Financial Times, December 4, 2001.

[24] The term ‘national business system’ has been coined by Richard Whitely to describe specific patterns of economic coordination and control in market economies. In this conception, the state is taken as the basic unit for studying the operations of firms. Firms organize endeavor individually and collectively to compete for state resources and legitimacy. National legal systems condify property rights, trade unions rights etc. Market regulations are pervasive. Labour markets are governed by labour law, court systeems, and corporate hierarchies. National culture as a set of values have consequnces for the way people identify with the nation, and is reflected in the laws and institutions of the land.See Richard Whitley, Divergent Capitalisms : The Social Structuring and Change of Business Systems, Oxford University Press, 1999.

[25] The crucial linkage between world and intra-European politics has been a constant theme in the writings of Stanley Hoffman, Decline or Renewal? France since the 1930s, New York, Viking Press, 1974; The New European Community: Decision-making and Institutional Change, co-edited with Robert O. Keohane, Boulder, Colorado, Westview Press, 1991; .After the Cold War: International Institutions and State Strategies in Europe, 1989-1991, co-edited with Robert O. Keohane and Joseph S. Nye, Boston, Harvard University Press, 1993); The European Sisyphus: Essays on Europe, 1964-1994, Boulder, Colorado, Westview Press, 1995.

[26] The best book on this is David Held, ,et al. (1999). Global Transformations Cambridge: Polity Press. The authors define globalization as “located on a continuum with the local, national and regional. At one end of the continuum lie social and economic relations and networks which are organized on a local and/or national basis; at the other end lie social and economic relations and networks which crystallize on the wider scale of regional and global interactions. Globalization can be taken to refer to those spatial-temporal processes of change which underpin a transformation in the organization of human affairs by linking together and expanding human activity across regions and continents. Without reference to such expansive spatial connections, there can be no clear or coherent formulation of this term. … A satisfactory definition of globalization must capture each of these elements: extensity (stretching), intensity, velocity and impact.”

[27]  Pierre Hassner, “The new Europe: from cold war to hot peace”,

International Journal,Vol. 27, No. 1, THE NEW EUROPE , Winter, 1971/1972, pp. 1-17.

[28] City of London Global Financial Centres Index March 2007

[29] According to a survey by Ernst & Young1, the other four CEE states which acceded to the EU on 1 May 2004,came to be regarded as the second most attractive foreign investment locale after western Europe, notably in manufacturing, and well ahead of China, in Allen and Overy, Foreign Direct Investment in Central and Eastern Europe, LLP, 2006. The region, including Russia, experienced a five-fold increase in foreign direct investment between 2003 and 2008, rising from US$30 billion to US$155 Foreign Direct Investment in Central-Eastern Europe: A case of boom and bust? PriceWaterhouseCoopers, March 2010. Similar figures are recorded in: Yama Temouri, Nigel L.Driffield, « Does German Foreign Direct Investment Lead to Job Losses at Home ? « , Applied Economics Quarterly, Vol.55. No.3. 2009. Pp.1-21.

[30] Hans Kundnani and Jonas Parello-Plesner, China and Germany: Why the emerging special relationship matters for Europe, Policy Brief.2011.

[31] Jeff Black, Germany’s Future Rising in East as Exports to China Eclipse US, Bloomberg, April 7, 2011.

[32] « German companies to increase investment », China’s Foreign Trade : China Council for the Promotion of International Trade.

[33] Linda Goldberg What is the status of the international roles of the dollar? Vox, 31 March 2010

[34] Felix Roth, Lars Jonung, Felicitas Nowak-Lehmann D. The Enduring Popularity of the Euro throughout the Crisis. CEPS Working Document No.358/December 2011.

[35] For a critical account of this policy of « breathing inflation » into the Euroland ecconomy, see Brandan Brown, Euro Crash : The exit route from monetary failure in Europe, Palgrave, MacMillan, 2012.

[36] Alan Greenspan, The Age of Turbulence: Adventures in a New World, Penguin, 2008.

[37] European Commission, Directorate General of Economic and Financial Affairs, EMU@10: successes and failures of EMU, European Economy, /2008. Luxemburg, 2008. A similar favourable, but sober assessment of the Eruo is by Otmar Issing, a founding member of the Executive Board of the ECB, Otmar Issing, The Birth of the Euro, Cambridge University Press, 2008.

[38] Charles. Goodhart, “Understanding the Euro Requires Political Economy, Not Just Economics“. Econ Journal Watch 7(1): 59–60. Martin Feldstein, The Failure of the Euro, The Little Currency That Couldn’t, Foreign AffairsJanuary/February 2012; in follow up to his “EMU and international Conflict, Foreign Affairs, Nov/Dec 1997. A pro-EU account of the skeptics view is provided in Lars Jonung, Eoin Drea, It Can’t Happen, It’s a Bad Idea, It Won’t Last: U.S. Economists on the EMU and the Euro, 1989-2002, Econ Journal Watch Volume 7, Number 1 January 2010, pp 4-52.

[39] MacDougall Committee [Study Group on the Role of Public Finance in European Integration] (1997), Report of the Study Group, Brussels, European Commission. The Commission’s own MacDougall Report of 1977 had proposed an EU budget of over 7% of European gdp in order to offset asymmetric shocks once monetary independence was lost. The EU budget in 2008 was about 1.4% of EU gdp.

[40] In One Money, One Market: An evaluation of the potential benefits and costs of forming an economic and monetary union, Commission of the European Communities, Directorate-General for economic and financial affairs, of the European Economy. 44. October 1990, the authors pointed out that, absent an EU federal budget poorer countries like Ireland, Spain, Portugal and Greece, would have to be wholly committed to the modernization of their economies, if they were to prosper.

[41] A much quoted article on major differences between European countries’ labour markets, is André Sapir, Globalization and the Reform of European Social Models. Journal of Common Market Studies, Vol. 44, No. 2, pp. 369-390, June 2006.

[42] European Commission, Directorate General, Employment, Social Affairs and Equal Opportunities, Geographic Mobility in the European Union: Optimising its economic and social benefits, Contract VT/2006/042. Final Report, April 2008.

[43] Charlemagne : European politics : « Germany: Europe’s fed-up sugar daddy, The Economist, May 20,2010.

[44] Interview avec le President de la Commission, Romano Prodi, Le Monde, Octobre 17, 2002.

[45] On the relation of politics to German local banks, see the study, by Oliver Vins, How Politics influence state-owned banks, The case of the German savings banks, Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting, No. 191 November 2008.

[46] Carlo Bastasin, Saving Europe, p.51; Monetary and Economic Department, Detailed tables on preliminary locational and consolidated banking statistics at end-June 2011. BIS, October 2011.

[47] Report of the High-Level Group on Financial Supervision in the EU . Chaired by Jacques de Larosière, Report, 25 February 2009. P.41. Para.159.

[48] “Ich fühlte mich getäuscht”, Extracts from Das Krisen-Tagebuch des Peer Steinbrück, Der Spiegel, 37/2010.

[49] “Jousting Egos-Germany and France Compete for Role of Financial Savior”, Spiegel Online, 10/28/2008.

[50] “Wall Street  helped to mask debt fuelling Europe’s crisis » , New York Times, February 13, 2010.

[51]  Tyler Durden, HIFX, “Step Aside Greece: How Gustavo Piga Exposed Europe’s Enron In 2001 – Focusing On Italy’s Libor MINUS 16.77% Swap; Was “Counterpart N” A Threat To Piga’s Life? 2/28/2010.

[52] “La Bce: tassi fermi e nessun aiuto ai conti della Grecia”, Il Sole 24 Ore, 6 January, 2010.

[53]“Euro Is ‘Burning Building,’ EU Has Too Much Power, Hague Tells Spectator”, Bloomberg, September 28, 2011.

[54] Felix Roth, Lars Jonung, Felicitas Nowak-Lehmann D. “The Induring Popularity of the Euro throughout the Crisis.” CEPS Working Document No.358/December 2011.

[55] Allensbach-Analyse : « Vertrauenverlust für den Euro », Frankfurter Allgemeine Zeitung, April 28, 2010.

[56]“France has second thoughts about the Euro”, PJ Media, December 10, 2011.

[57] Gérard Lafay, Jacques Sapir, Philippe Villina, « Abandonner l’euro pour sauver les Européens”, Le Figaro, June 22, 2011.

[58] Emnid-Umfrage, Mehrheit der Deutschen sieht Euro kritisch, Frankfurter Allgemeine Zeitung, September 17, 2012.

[59] On the evolution of the crisis, Elie Cohen, L’euro à l’épreuve de la crise des dettes souveraines, Politique Etrangère, 1: 2012, pp. 23-38.

[60] « A Timebomb at the Heart of Europe:Why France could become the biggest danger to Europe’s currency”, The Economist, November 17, 2012.

[61] Charles Wyplosz, The Eurozone’s May 2010 bailout strategy is a disaster », Vox. 20, June 2012.

[62] Wilhelm Hankel, Wilhelm Nölling, Karl Albrecht Schachtschneider and Joachim Starbaty , « A Euro exit is the only way out for Greece « , Financial Times, March 25, 2010.

[63] Committee on Economic and Monetary Affairs, « Monetary Dialogue with Jean-Claude Trichet, President of the ECB », March 22, 2010(

[64] Jan Schiedbach, Government debt better at home than abroad ? Talking point, DB Research, August 23, 2012.

[65] Daniel Gross, External versus domestic debt in the Euro crisis, Vox, 24 May, 2012.

[66] Holger Steltzner, « Die Griechische Tragödie : Der Letzte Anker draf nicht reissen », Frankfurter Allgemeine Zeitung, February 10, 2010.

[67] UBS Investment Research, Global Economic Perspectives : Euro break-up : consequences, 6 September 2011.

[68] FMSA, Federal Agency for Financial Market Stability, Financial-Market Stabilisation Fund Act of 17 October 2008 (Federal Law Gazette I, p. 1982), as amended by Article 1 of the Act of 17 July 2009 (Federal Law Gazette I, p. 1980)

[69] Peter Ludlow, Eurocomment Briefing,  Archive for June, 2010, June 17, Vol.7.7. and Vol.8 The European Council and the euro crisis, Spring 2010.

[70] World Bank, Ease of Doing Business in rankings. On employing workers, out of 183 economies, Ireland was 27 ; Italy  99 ; Greece 147 ; Spain 157 ; Germany, 158 ; France 165 ; Portugal 171. The least market friendly country was the Central African Republic.

[71]  Carlo Bastassin, p.208.

[72]This did not prevent France from insisting on Greece buying 6 frigates about which negotiations had started. Berlin was displeased on the reasonable grounds that sale of weapons to a highly indebted Greece was not a good idea. The fears were that German taxpayers would  end up paying for part of the deal. “Germans Question Contract: France to Sell Frigates to Greece in Controversial Deal”, Spiegel Online 10/19/2011.

[73] Berlusconi was clearly in trouble by the time he was labeled, “The man who screwed an entire country. The Berlusconi era will haunt Italy for years to come, The Economist, Jun 9th 2011. This author does not agree“ with the tenor of this much repeated argument.  Trichet e Draghi: “ un’ azione pressante per ristabilire la fiducia degli investitori, Corriera della Sera, August 5, 2011., Clearing Way for New Government: Papandreou Steps Down as Greek Prime Minister, Spiegel Online 9 November 2011; Ciao Silvio:Italy Looks Beyond Mess Left by Berlusconi, Spiegel Online ,15, November 2011.

[74] Greece: 2009 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Greece. August 2009 IMF Country Report No. 09/244.

[75] IMF Executive Board Approves €28 Billion Arrangement Under Extended Fund Facility for Greece, Press Release No. 12/85, March 15, 2012.

[76] In Jeffrey Gedmin, « Helmut Kohl, Giant : His Cold War, His Germany, His Europe. Hoover Institution, Stanford University, Policy Review, No.96. August 1, 1999.

[77] Source of English translation: “From Confederacy to Federation – Thoughts on the Finality of European Integration. Speech by Joschka Fischer at Humboldt University in Berlin, May 12, 2000.” Berlin: Auswärtiges Amt (The Federal Foreign Office). Available on

[78] Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union, Official Journal of the European Union, 2008/C 115/01.

[79]  Federal Constitutional Court – Press office  Press release no. 72/2009 of 30 June 2009, Judgment of 30 June 2009 Act Approving the Treaty of Lisbon compatible with the Basic Law; accompanying law unconstitutional to the extent that legislative bodies have not been accorded sufficient rights of participation

[80] Federal Constitutional Court – Press office -Press release no. 55/2011 of 7 September 2011. Judgment of 7 September 2011, Constitutional complaints lodged against aid measures for Greece and against the euro rescue package unsuccessful –No violation of the Bundestag’s budget autonomy.

[81] Joachim Jahn, « Vereinigte Staaten von Europa wird es nicht geben », Interview with Paul Kirchhof, Frankfurter Allgemeine Zeitung, June 30, 2009.

[82] Hans-Olaf Henkel, « A sceptic’s solution : a breakaway currency », Financial Times, August 29, 2011.

[83] Wolfgang Münchau, Euro zone crisis will last 20 years”, Financial Times, July 8, 2012.

[84] Deutsche Bank Research, Financial supervision in the EU: Incremental progress, success not ensured, August 4, 2011.

[85] “EU Commission unveils vision for euro zone’s integration”, Reuters, November 28, 2012.

[86] Stephen George, An Awkward Partner: Britain in the European Community, Oxford, OUP, 3rd edition. 1998. The phrase frequently appears in press commentaries. The assumption, presumably, is that other member states are not awkward.

[87] The Trans-Atlantic Take: Obama Victory to Further Euro-Crisis Clash with Berlin, Spiegel OnLine, November 7, 2012.

[88] « Markets, Germany wary as Hollande wins in France”, Reuters, May 7, 2012.

[89] « A Timebomb at the Heart of Europe:Why France could become the biggest danger to Europe’s currency”, The Economist, November 17, 2012.

[90] « UK ‘s Euro trade supremacy under attack », Financial Times, December 2, 2012.

[91] « Kanzlerin Merkel gibt sich als Europas Übermutter », Die Welt, February 7, 2012 ; « Germany and Europe : A very federal formula », Financial Times, February 9, 2012. Merkel proposed to the Christian Democrat party that the new European economic government and financial supervisory bodies would be responsible to the European Parliament, with the Council of Ministers as a second chamber.

[92] Martin Wolf, « The riddle of German self-interest », Financial Times, May 29, 2012.

[93] As Hans-Olf Henkel, wrote , “The Euro area’s competitiveness would fall behind other regions of the world.”in  « A sceptic’s solution : a breakaway currency », Financial Times, August 29, 2011.

[94] «  Why They Say Nein « , Los Angeles Times, September 6, 2002.

[95] Mycle Schneider,  Fukushima crisis: Can Japan be at the forefront of an authentic paradigm shift? Bulletin of the Atomic Scientists. 9 September 2011

[96] “The Lopsided U.N. Security Council Vote on Libya,” The Daily Beast, March 19, 2011

[97] Hans-Werner Sinn, Target Losses in Case of a Euro Break-up, CESIFO Working Paper No.3968 Category 1: Public Finance October 2012.

[98] UBS Investment Research, Global Economic Perspectives, Euro break-up – the consequences,  September 6, 2012.

[99]Hans-Olf Henkel, « A sceptic’s solution : a breakaway currency », Financial Times, August 29, 2011.

[100] Martin Wolf, Lunch with the FT : Jean-Claude Trichet, Financial Times, July 6, 2012.

About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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2 Responses to The Euro crisis and German primacy

  1. Pingback: The Euro-a Road to Hell Paved with Good Intentions? | Writing about history, politics & economics

  2. Pingback: The UK between In and Out: Review of Brexit to Nowhere and Rethinking the UK’s Circles of Influence. | Writing about history, politics & economics

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