German Finance Minister Wolfgang Schäuble: 'We Cannot Allow Greece to Turn into a Second Lehman Brothers'

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SPIEGEL: Rehn wants to reform the euro rules without amending the European treaties. Do you think that's possible?

Schäuble: I seriously doubt it. I don't believe that it would be possible, within the framework of current agreements, to deprive a country of its voting rights, for example. So we do have to talk about amending the treaties.

SPIEGEL: But that means it will take a long time. Referendums might be necessary in some countries.

Schäuble: You know, many things can happen very quickly in times of crisis. It was the same thing during the financial crisis two years ago. Just think how quickly international cooperation happened and the bailout laws were enacted.

SPIEGEL: That's true, but on balance the financial crisis has made the world poorer but not smarter. This is certainly true of the banks, which are vehemently fighting stronger regulation. And some countries are also stepping on the brakes. Are the good intentions petering out now?

Schäuble: Sheer necessity means that we will continue to fight for regulations for the financial markets. We will remain unrelenting in that respect. And many things have already been implemented at the G-20 level and within the EU. For example, we have improved the supervision of rating agencies. We have also introduced binding standards for compensation in the banking sector. Other things have already been put into motion, such as improving the equity capital rules. We will also push to curb speculation by the financial sector on the commodities markets.

SPIEGEL: What do you envision?

Schäuble: We must subject all products and all market players to rules. This principle also has to apply to commodities. They too can be of critical importance to an economy.

SPIEGEL: You once said that the EU must be given the option of excluding a country from the euro zone as a last resort.

Schäuble: That would be the logical thing to do. Look, why does Greece have to pay higher interest rates at the moment for its bonds than Lithuania, even though both countries are deeply in debt? The answer is that Greece cannot devalue its currency, because it's a member of the euro zone. That's why it would make sense to allow euro countries to withdraw from the monetary union in an emergency.

SPIEGEL: Now German taxpayers will play a particularly important role. Does the Greece package jeopardize your budget planning?

Schäuble: Not at all. We're talking about a loan, which will earn a decent rate of interest. If all goes well, the German state will even turn a profit.

SPIEGEL: You don't even believe that yourself. If Greece is unable to repay its debts in full, it will come at the taxpayers' expense.

Schäuble: The risk is manageable. The package will consist of loans issued by the (German state bank) KfW, which the federal government guarantees. We don't need a supplementary budget for that. However, we will introduce a law that will have to be ratified by (the German parliament) the Bundestag.

SPIEGEL: The federal budget also faces a threat from a completely different quarter. Your coalition partner, the business-friendly Free Democratic Party, is calling for a €16 billion ($21.6 billion) tax cut. But the government's coffers are empty. Where is the money supposed to come from?

Schäuble: I don't want to comment on the FDP's proposal. But I do stand by the coalition agreement.

SPIEGEL: It states that the financial burden on citizens is to be reduced by €24 billion in this legislative period.

Schäuble: Yes, and we've already achieved at least €4.5 billion of that. We now find ourselves in a difficult economic situation, and tax revenues are declining. In light of this development, we will make a decision when putting together the 2011 budget. And by the way, anyone can make proposals. After all, the FDP does have a party convention.

SPIEGEL: A number of federal states have already signaled that they will not participate in the financing of the reform. Can the federal government come up with the billions on its own?

Schäuble: The coalition agreements apply to income tax, and the federal government is entitled to 42.5 percent of those revenues. That's €8 billion. The federal government will have to come to an agreement with the Bundestag on this issue. We have no influence on the Bundesrat (Editor's note: the upper house of the German parliament, which represents the states at the federal level). No state is the servant of the federal government, and the federal finance minister cannot speak for the majority in the Bundesrat.

SPIEGEL: Which means?

Schäuble: Germany's municipalities are in an unusually difficult financial situation at the moment. That's why -- and this is stated in the coalition agreement -- we will address municipal finances first. When I consider both undertakings, I have an idea of what we can achieve in this legislative period and what could possibly be postponed until a future legislative period. In any case, we are subject to the "debt brake" in the constitution, which in the future will only allow us to spend as much as we take in. (Editor's note: The so-called debt brake or debt ceiling is an amendment to the German constitution, the Basic Law, which from 2011 obliges Berlin to start balancing the budget and will impose a maximum deficit of 0.35 percent of GDP by 2016.)

SPIEGEL: Are Germany's towns and municipalities truly in such bad shape?

Schäuble: Some are. They have fewer and fewer options, and some are now under the mandatory supervision of the federal states. This is a dangerous development, because local self-administration is the core of our democratic system. That's why the government has made the municipalities' financial problems a priority.

SPIEGEL: What you're saying doesn't sound like a tax cut.

Schäuble: The coalition agreement is in place, and we will abide by it.

SPIEGEL: How great is the likelihood that there will be no tax cut, and the coalition agreement will still be upheld?

Schäuble: It isn't a contradiction, at any rate. After all, the agreement contains a financing caveat. And besides, this federal government will abide by the constitution. I can say this with some confidence, which is why I know that we have relatively little room for maneuver. I also notice that reducing the debt is becoming more and more of a priority in the view of the general public.

SPIEGEL: Mr. Schäuble, we thank you for this interview.

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• Part 1: 'We Cannot Allow Greece to Turn into a Second Lehman Brothers'
• Part 2: 'We Are Prepared to Do What Is Necessary'
• Part 3: 'We Will Continue to Fight for Regulations for the Financial Markets'