London Debt Agreement

Tom McDonnell: Today marks the 60th anniversary of the start of negotiations concerning post war debt relief for Germany. The "London Agreement on German External Debts", also known as the London Debt Agreement, was a crucial component of Germany's post war economic miracle. You can find the text of the agreement here. The guardian has coverage here and Deutsche Welle has coverage here.

Invoking Luther

Tom Healy: Writing in today's Irish Times Steven Ozment claims that German Lutheranism explains and justifies the stance of the current German administration. 'According to polls', writes Steven Ozment, Germans 'hold tight to their belief, born of staunch Lutheran teachings, that human life cannot thrive in deadbeat towns and profligate lands'. I am not convinced and while not an expert in Lutheranism I am not convinced, either, that Brother Martin of Erfurt would see justification for what is sometimes inappropriately referred to as the 'German view' on Europe and the 'German approach' to European integration and co-responsibility.

Nat O'Connor has already posted about a statement by Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin. In truth there is no one German view or solution anymore than there is an Irish one. If the current European crisis has exposed deep inter-country tensions and rivalries it has also shown up the underlying social tensions within countries and across the entire continent.  There are many incidents of 'profligate lands' and 'deadbeat towns' (One hopes that this is not a reference to NAMA land only!).

The diagnosis of the European political-economic crisis and the appropriates solutions depends to some extent on how one sees the problem. If you see it as the cartoon image of the irresponsible Irish or Greeks living off the hard-working Germans then the solution is one involving pain and redemption for the indolent and misbehaving. We all know where that mind-set and thinking in the 1840s led the official response to the famine in Ireland (the age of self-reliance, market freedom and work ethic etc).

 If, alternatively, you see the problem as one of systemic failure in the private sector aided by systemic failure in public regulation and governance then the problem shifts from one of national or sectoral blame-shifting to one of how we overcome the neo-liberal world order. If you want to put it in biblical terms - the wages of neo-liberalism is death - death of social cohesion, death of social justice and in the end death of civilisation. Yes, individuals are responsible - but systems and structures are also part of the problem I suggest.

The problem and challenge is now to create a stronger European dynamic and solidarity while retaining the principle of subsidiarity so beloved by the early pioneers of the European project. We must avoid lazy stereotyping of national groups (the profligate peripherals versus the disciplined core etc) as well as enlisting the backing of this or that figure from the rich and diverse cultural tapestry of Europe. Scandinavian Lutheranism could arguably have some connection to the civic values and practices of our Nordic neighbours at least in terms of cultural history and economic conditions.

I will conclude with a quote from one of the greatest thinkers and heroes of the last century, Dietrich Bonhoeffer - a German and Lutheran who was martyred in 1945: '“We are not to simply bandage the wounds of victims beneath the wheels of injustice, we are to drive a spoke into the wheel itself.”

Germany in and with and for Europe

Nat O'Connor: As noted in an earlier post, it is useful to see that there is lively debate going on in Germany about Europe and alternatives to austerity. This is an important counterbalance to the 'Austerity Germany' we see presented in much of the media, which creates the illusion that the German people are united in a desire to punish Ireland and other peripheral EU states for our economic and fiscal woes. On the contrary, Helmut Schmidt makes a major contribution to the debate by pointing out Germany's benefit from ensuring solidarity between the centre and periphery of the EU.

Helmut Schmidt was the Social Democratic Chancellor of West Germany from 1974 to 1982. In a key speech to the German Social Democrat party conference in 2011, he outlines the importance of Germany's integration with the other countries of Europe and proposes "radical regulations" for the EU's financial markets as well as the "financing of growth-enhancing projects" to help EU member-states achieve balanced budgets.

The Foundation for European Progressive Studies (FEPS) has recently republished this speech in 15 other European languages in order for Schmidt's message to be widely heard across Europe. An online, English version of the speech is here.

Born in 1918, Schmit takes a long view of the challenges of the 21st Century, as well as the failures of the 20th. He notes that there has been conflict between the centre and periphery of Europe since the Middle Ages - and it most often ended in war. The founders of the European Coal and Steel Community were explicitly motivated to bind Germany into an integrated Europe and to avoid further conflict.

At the same time, Schmidt argues that German strategic interests are also better served by integration into Europe. By 2050, European nations will each constitute "just a fraction of one per cent of the world's population." ... "That is why the European nation states have a long-term strategic interest in their mutual integration."

Schmidt points to recent German budget surpluses as a "very undesirable development". ... "as in reality all our surpluses are the deficits of other countries." (There is a lesson there for those who claim that Ireland can restore its economy on the back of exports alone).

Schmidt supports some sort of fiscal transfer at EU level. In terms of contributions to the EU's budget, he notes: "It is a fact that, for decades now, Germany has been a net contributor. ... And of course Greece, Portugal and Ireland have always been net recipients."

Schmidt identifies the weakness of the EU's institutions in addressing the financial crisis. "Umpteen thousands of financial traders in the USA and Europe, plus a number of ratings agencies, have succeeded in turning the politically responsible governments in Europe into hostages." ... "In 2008/2009, governments the world over managed to rescue the banks with the help of guarantees and the taxpayers' money. Since 2010, however, this herd of highly intelligent, psychosis-prone financial managers has gone back to its old game of profits and bonuses."

He argues that the EU or Eurozone could and should "introduce radical regulations for the common financial market in the euro currency area. These regulations should cover the separation of normal commercial banks from investment and shadow banks; a ban on the short selling of securities at a future date; a ban on trading in derivatives, unless they have been approved by the official stock exchange supervisory body; and the effective limitation of transactions affecting the euro area carried out by the currently unsupervised rating agencies."

Various other policies are also required, including "monitoring mechanisms, a common economic and fiscal policy as well as a series of tax, spending, social and labour market reforms in the different countries." However, despite the need for closer coordination in a range of area, Schmidt argues that the EU will not become a federation any time soon.

"A common debt will be inevitable too. We Germans should not refuse to accept this..."

"We should also avoid advocating an extreme deflationary policy for the whole of Europe. On the contrary, Jacques Delors is quite right to insist that a balancing of the budgets should be accompanied by the introduction and financing of growth-enhancing projects. No country can consolidate its budget without growth and without new jobs. Those who believe that Europe can recover solely by making budgetary savings should take a close look at the fateful effects of Heinrich Brüening's deflationary policy in 1930/32. It triggered depression and intolerable levels of unemployment, thus paving the way for the demise of the first German democracy."

In short, Helmut Schmidt's speech is a reminder that, taking the long view, not only are there alternatives to austerity - but austerity on its own is not a solution at all. Solidarity and leadership are needed to bring about recovery, led by an integrated EU, with centre and periphery working together for their mutual benefit.

Solving the Euro Crisis without Germany Paying More

Nat O'Connor: It seems that domestic politics in Germany are focused on dealing with a perception by German taxpayers that they are at risk of 'paying' for the euro crisis.

Yet, there seem to be obvious political institutional solutions, using the ECB, that could help resolve the immediate euro crisis without the Germans having to 'pick up the bill'.

First of all, and partially an aside, it is calculated by German development bank, Kreditanstalt für Wiederaufbau (cited by the influential Hans Böckler Stiftung, bottom of page 5, in German), that Germany benefitted from having the euro, as a relatively weaker currency than the Deutschmark would have been. They argue Germany benefited by €50-60 billion in the last two years by not having their own currency (which would have been stronger and therefore raised the cost and lowered the competitiveness of their exports). Although this argument is circulating within Germany, it is not influencing the European debate as much as it should.

Secondly, even leaving aside this important line of argument about the less-often-calculated benefits to Germany, there is the obvious solution to any euro crisis: change the rules governing the European Central Bank (ECB). Currently the ECB is constrained to only focus on inflation. It should have a new mandate: to remain strongly independent, but to also focus on maximising employment and also act as a lender of last resort, which John Bruton spoke about very clearly on RTÉ Morning Ireland yesterday (17 Nov).

What the lender of last resort means is that the ECB would buy the government bonds of any state that is having a hard time getting a sustainable rate of interest on the private markets. Of course, if some countries benefit from this facility more than others, that would be effectively a form of fiscal transfer between eurozone members. The ECB would remain independent and could not be instructed when to buy bonds, but it would still be open to excess use.

The risk (to Germany and other stronger economies) is that currently weaker economies (like Italy, Greece or Ireland) might lean heavily on this facility instead of making the necessary (and politically difficult) structural reforms in their own economies and public spending.

One possible solution (and this is open to constructive criticism as I may have missed an equally obvious flaw!) is for a simple mechanism to be instated to resolve this: the ECB could simply keep track of how much each country benefits from it acting as lender of last resort. This record could in turn affect the annual contributions each country has to make to the EU. So although stronger countries like Germany would pay in the short term, this would be equalised in the long term by relatively poorer countries paying a little over the odds in their annual payments to the EU for a period of years (or decades if necessary). Such a mechanism should provide a disincentive for countries to lean too heavily on the lender of last resort and be obliged to make harder domestic decisions. Yet it would prevent the kind of unnessary crisis that Italy and others are facing at this time. (Note that Italy has been running a Government surplus, not a deficit - as I think John Bruton pointed out in the above interview).

The proposal of such an equalisation mechanism might also be the sugar-coating necessary for German voters to accept the need for the ECB to have as full a mandate as the Bank of England or US Federal Reserve.

German Think-tanks, Ireland and the European Crisis

Nat O'Connor: The Taoiseach, Enda Kenny, is making an official visit to Berlin today. As well as meeting Chancellor Angela Merkel, he will speak to the Konrad Adenauer Stiftung (see also, their UK branch).

The Stiftungen (aka think-tanks, foundations) are central to the German political landscape. They are independent of the political parties, but there is one political Stiftung per party, as well as a range of other ones.

I've been reviewing what the different German foundations have to say about the Irish situation and the euro crisis (with the assistance of our intern, Nina Roβmann). What this review shows is that, unlike the rather one-dimensional view that's often reported about what 'Germany says', there is a lively and nuanced policy debate going on in Germany. What follows are some highlights of this debate.

The Konrad Adenauer Stiftung (KAS) is linked to Angela Merkel's Christian Democrat party. Fine Gael, especially in the European parliament, has fashioned itself as a Christian democratic party, although there are important historical differences in the origins of most continental parties of this type. Also, mainstream Irish liberal economics would be far to the right of the German mainstream.

KAS's economic policy is centred on the 'social market economy', regulated markets balanced with social protection and responsibility towards wider society. In terms of Ireland, KAS has identified the emigration of workers as one of the major challenges Ireland faces. They identify cuts to child benefits and public sector wages as hitting ordinary households. They point to €114.7 billion of German claims in Irish banks and the direct repercussions to German banks if these were not repaid.

In their wider analysis, they ask: Is Ireland a new Greece? But they answer 'no'. They explain Ireland's crisis as one of refinancing, whereas the Greek crisis is explained as having more problems of lost competitiveness and structural problems. In one paper, KAS argues against a political union at EU level. They do advocate structural and fiscal reforms in deficit countries and complain that the 'no bailot clause' of the EU treaties was undermined (Article 125 of the Treaty of the Functioning of the EU). However, in a more recent paper KAS's chairman makes an argument for economic government at EU level, which is a changed position.

The other large political foundation is the Friedrich Ebert Stiftung (main site in German only), linked to the social democratic party. The Friedrich Ebert Stiftung (FES) has a different perspective on Ireland and the crisis. Their analysis is that the establishment of monetary union without political union has brought the EU to the brink of collapse. They argues that it is false to claim wage policies in deficit countries are responsibile for the current account imbalances. Instead they point to global economic and financial factors. They argue that Ireland's pro-cyclical spending cuts only aggravated the crisis here and harmed the welfare state.

FES argue that before countries like Ireland lower their wages, relatively low wage countries like Germany have to raise theirs. They also criticise the unequal distribution of wealth in Ireland. FES call for better co-ordination of fiscal and social policies across EU member states, including harmonised corporation tax.

On the wider crisis, FES criticises the policies imposed by the EU on deficit countries, and it warns that this will only lead to rising unemployment, cuts in social services and growing euroscepticism within European trade union and labour movements. FES proposes a four-part change: 1. A European New Deal infrastructure investment strategy for employment; 2. some form of economic government at EU level, including stronger democracy at EU level; 3. co-ordination of wage, fiscal and social policies across Europe; and 4. Eurobonds as a new way of financing government debt. FES argue against a 'growth' strategy for Europe per se, but a strategy for sustainable prosperity based on a real culture of solidarity.

The other four Stiftungen are Heinrich Böll (green), Friedrich Naumann (liberal), Rosa Luxemburg (democratic socialist) and Hanns Seidel (Christian social union).

Heinrich Böll Stiftung (HBS) view Ireland's tax policies as negative. They identify the migration of German companies and jobs to Ireland due to lower taxes. They advocate saving German banks who suffered from 'toxic' Irish stocks. However, they argue that there is of course no alternative to saving Ireland, and the lesson learned should be the establishment of common fiscal and economic policy. They note the German Green Party's Gerhart Schick's call for Ireland to raise corporation tax, not VAT. He also stated that the rich in Ireland have profited above average and should now share their wealth, and that spreading out the burden of the crisis is unfair, as the poor are hit hardest. In another publication, HBS criticise the cuts to unemployment benefit and eduction in Ireland.

On the wider crisis, HBS see a federal EU as necessary and the natural consequence of monetary union. However, they note the evidence of a lack of support for this. They also note the fear of 'Germanisation' of economic policy, and they call for more attention to be paid to the banking sector.

The other foundations have less to say about Ireland in particular, but have their own analyses of the European crisis.

Friedrich Naumann Stiftung (FNS) strongly condemns the violation of the EU's no bailout clause. They argue that the current crisis is not about the euro currency, but about public debt. They argue that any move to European co-ordination of economic and financial policies would be like a 'centrally-planned economy' and they compare any such regulatory framework with George Orwell's 1984. FNS argue the pressure being exerted on Greece by the markets (i.e. by us as free citizens) to get its public finances in order is viewed by the Greek government as slavery which must be resisted.

FNS point out that the global ratings agencies (e.g. Standard & Poors, Moody's and Fitch) are in a conflict of interest when they provide consulting alongside credit rating of states at the same time. FNS also have a paper supporting private currencies to compete with the state's monopoly on currency.

The Rosa Luxemburg Stiftung (RLS) identifies a balance to be struck between the fears of many on the Left of neo-liberal economic policy, and the potential benefits of closer European integration for citizens and society. At one RLS conference, the Jesuit social ethicist Friedhelm Hengsbach SJ argues that the ongoing debate on the EU 'transfer union' is absurd as mechanisms like the European cohesion fund, whose aim it is to balance inequalities among member states, are already in place. He criticises austerity and calls instead for co-ordination of employment, growth, financial, fiscal, wage and social policy. However, he is against common EU economic governance.

RLS argues that the Greek crisis has been oversimplified. The many differences in development in Greece underlie the problems they face, not just wage cost competition. The lack of a social union in the EU permitted redistribution from the bottom to the top, and they call for an EU wide structural policy to trigger a conversion process to help them develop what they lack in public administration, legal framework, social security, regulation, company strength, banking, procurement, infrastructure, etc.

Hanns Seidel stiftung (HSS) focuses more on its core mission, supporting "the democratic and civic education of the German people with a Christian basis". They argue for free personality development and autonomy as well as social responsibility and solidarity. They argue this mission is more important than ever, since requirements for more autonomy, a new "culture of independence" and an "active society of citizens" are increasingly evolving.

The existence of the democracy education foundations is a requirement of the post-war constitution, as is their funding by the state. While this originated as an idea imposed by the Allies that the Germans needed to be 'taught democracy', the Stiftungen have evolved into a major resource for the German political system, and they carry out a wide range of policy research. The foundations also invest a lot of their resources around the world engaged in democracy education.

The funding of the Stiftungen is linked to the long-term success of their political party in parliament, so they have an incentive to supply them with policies that will be successful in the long-term, not just in advance of the next election. This investment pays dividends to the German policy-makers by providing them with a range of well-researched options. This also provides the German public with a more nuanced debate, which is helpful in building public support for pragmatic solutions.

When we have shuffled off this Greek coil

Tom McDonnell: The sounds out of Germany are becoming more confused by the day. Increasingly there is a growing expectation of a Greek default. Yanis Varoufakis asks whether Greece is finished over at the Social Economic Journal.
While a Greek default may be inevitable Yanis argues that Germany will not allow Greece to default before the Germans have put in place a plan for splitting Greece’s monetary system from that of the surplus countries. He fears the German plan will precipitate an uncontrolled disintegration of the Eurozone leading to a hard recession across the continent.