Germany’s eurozone gambit could meet a swift death
Building a more effective, closely united Europe has never presented a bigger challenge
When Martin Luther arrived at the Diet of Worms in 1521 to defend his Protestant ideas in front of the Catholic hierarchy, a guard whispered to him: “Little monk, it is an arduous path you are taking.” The same thought may occur to Olaf Scholz, Germany’s finance minister, as he tries to convince his country’s political and financial establishment, not to mention other eurozone governments, of the merits of the plan he unveiled this week for completing Europe’s banking union.
The lack of a comprehensive union, including common deposit insurance, is one of the vulnerabilities that could be exposed if the 19-nation eurozone experiences turmoil of the kind that almost destroyed Europe’s currency union in 2010-12. For the past seven years, however, efforts to set up common deposit insurance have met a wall of resistance from northern Europeans, suspicious of being lured into forking out billions for their southern neighbours.
What explains Mr Scholz’s initiative and will it lead to anything? The answers lie in Germany’s unruly domestic politics, its leaders’ gradual reassessment of the nation’s standing and the broader problems of EU integration.
Building a more effective, closely united Europe has never presented a bigger challenge. Disputes abound over asylum policy, enlargement into the Balkans, the EU’s next long-term budget and much else. Trade wars and a choppy world economy point to difficulties ahead. Next time — unlike during the eurozone’s existential crisis — the European Central Bank’s unconventional monetary measures might not be enough to save the day.
As Mr Scholz recognises, this provides a compelling argument for prompt action to strengthen the eurozone’s defences, starting with common deposit insurance. His proposals are limited, consisting not of a fully mutualised scheme, but of a reinsurance mechanism in which EU funds would be deployed once national guarantees had run out. Moreover, he appears to stipulate conditions for German participation, such as stricter regulation of banks’ ownership of sovereign bonds and a common corporate tax base — unacceptable to some eurozone governments. Nonetheless Mr Scholz’s plan is unquestionably a bolder German initiative than any in recent years.
One reason for its appearance lies in emerging concern in Berlin about friendships on the international, especially European, stage. German relations with the US are at a postwar low. Brexit, detaching the UK from Europe, will turn it into a hard-nosed competitor, German strategists suspect. Emmanuel Macron, France’s president, does not disguise his impatience with tepid German responses to his proposals for overcoming the EU’s troubles.
The desire to build bridges, and to display a more positive attitude towards eurozone integration, was illustrated in Germany’s recent choice of Isabel Schnabel as its next representative on the ECB’s executive board. Unlike most German economists, not to mention politicians, she has avoided demonising the ECB as a wrecker of German central banking principles and a thief of ordinary Germans’ bank savings.
Mr Scholz’s banking union plan fits the pattern. His ideas do not go far enough for Italy, but can be seen as an attempt to send a constructive signal to the less Eurosceptic government that came to power in September. It might be more awkward to deal with Matteo Salvini, the hard-right former deputy premier waiting in the wings.
However, this is far from the whole story. Mr Scholz did not make his proposal on behalf of the German government, a coalition between his Social Democrats and Chancellor Angela Merkel’s Christian Democrats. Nor did he consult in advance with CDU financial experts, who soon aired doubts. Coalition quarrels could yet doom his initiative to the same swift death that befell a proposal he made last year for an EU unemployment insurance scheme.
The manner in which Mr Scholz unveiled his plan resembles the way Annegret Kramp-Karrenbauer, Germany’s defence minister, CDU leader and Ms Merkel’s preferred successor, floated an idea for a multinational security zone in Syria. She did not consult with government colleagues, either.
Meanwhile, an article by Heiko Maas, SPD foreign minister, on the 30th anniversary of German unification thanked Mikhail Gorbachev, the former Soviet leader, and other Europeans for their support. He failed to mention the US, in 1990 the most helpful of the big powers. The overall impression is one of absent consultation, proposals from one government party attacked by the other, and no firm guidance from the top — that is to say, Ms Merkel. Small wonder that Norbert Röttgen, chairman of the Bundestag’s foreign affairs committee, described Germany as “completely paralysed, held captive by a quarrelling, zombie coalition”.
Mr Scholz’s plan has many promising features. But the German coalition is fractious, focused on a post-Merkel future and unsettled by recent bad election results. Progress on European banking union is almost certain to remain slow, a hostage to the next Bundestag elections in 2021, and to the instincts and outlook of the next German government.