09/12/2011 02:12 PM

Interview with Former German Finance Minister

'Germans Will Have to Pay'

In a SPIEGEL interview, former German finance minister Peer Steinbrück, 64, now a prominent member of the opposition Social Democratic Party, argues for a complete overhaul of Europe's currency union -- one that would include euro bonds, strict rules and harsh sanctions.

SPIEGEL: Mr. Steinbrück, all efforts to end the euro crisis have so far failed. So why aren't any politicians saying that the common currency just can't be saved, at least as the euro was once conceived and sold to the populace?

Steinbrück: What makes you think the euro can't be saved?

SPIEGEL: Because it has become clear that the national economies that were welded together into the currency union were too different and that the euro has increased rather than decreased these disparities.

Steinbrück: No one will argue with that. Indebtedness and competitiveness have drifted apart. But that's not going to make the euro disappear. We could argue for a long time over how many and which member states will still be in the euro zone at the end of the decade if we don't get this drifting under control. But I would bet that the euro continues to exist and that its importance as a global currency will likely increase.

SPIEGEL: The only question is: In what form? In any case, it's not going to survive in the way it's defined in the European Union treaties.

Steinbrück: If you mean that the euro system will change, and the way it's anchored in the EU's body of rules and regulations, I would agree with you.

SPIEGEL: It will be a union of shared liability and transfers -- that is, something completely different than what was originally agreed to. As they are now, the EU treaties stipulate that no member country should be held liable for the debts of another.

Steinbrück: That was an error that became evident during the crisis. This long-held delusion should have already been acknowledged and explained a year and a half ago.

SPIEGEL: Was it a necessary lie? Did politicians believe they wouldn't be able to push through the currency union without it?

Steinbrück: At the time, too much consideration was given to domestic sentiments and resentments. They were acting according to the sentiment that Germans shouldn't become the paymaster of Europe.

SPIEGEL: Are they supposed to be that in the future?

Steinbrück: One has to explain to people that the EU in this form is the answer both to 1945 and to the 21st century, in a dramatically altered world with new heavyweights, and that Germany benefits from the continued integration of Europe in political, economic and societal ways. And, of course, that means the Germans will have to pay. But the money is well invested in both our future and Europe's, in peace and prosperity. This is the kind of explanation that's missing. German politicians should have come up with a new narrative for Europe -- and especially one that justifies the country's financial contribution to its own people.

SPIEGEL: What should the future design of the currency union look like?

Steinbrück: A country that wants to benefit from euro bonds, for example, ...

SPIEGEL: … that is, from bonds guaranteed by the euro zone as a whole ...

Steinbrück: … will have to yield part of its budgetary sovereignty to independent institutions. It will have to have drafts of its national budgets approved and submit to macroeconomic monitoring.

SPIEGEL: In other words, the rights of particular countries to devise their own budgets will be severely curtailed.

Steinbrück: Yes, but that's not any different from what the International Monetary Fund (IMF) also does with countries in crisis.

SPIEGEL: But what happens if the respective governments refuse to subject themselves to this regime, for example, because strict belt-tightening measures trigger unrest among their populations?

Steinbrück: Then they won't get any euro bonds.

SPIEGEL: And then what?

Steinbrück: Then these countries will be forced to go it alone and fend for themselves. One can't threaten sanctions without being prepared to implement them, too.

SPIEGEL: Wouldn't this ultimately result in the bankruptcy of a euro-zone member?

Steinbrück: In an extreme case, it would involve orderly insolvency proceedings for the state.

SPIEGEL: If I correctly understand what you are saying, you believe there's going to be a sort of "currency union 2.0" with new, stricter rules. Why should people believe this one will be any different from the old one, that countries are going to honor the new regulations and keep their new promises?

Steinbrück: The bang was really pretty loud; everyone heard it. If we weren't convinced that there are also political learning curves, we would be forced to stay in bed in the morning and pull the covers over our heads.

SPIEGEL: Even so, how do you intend to ensure that history doesn't repeat itself?

Steinbrück: The EU institutions that dictate conditions and monitor compliance with them need to be independent. They also can't be trumped by politics.

'There's No More Place in the Euro Zone for Laxness'

SPIEGEL: Would that also require amending the EU treaties?

Steinbrück: In a number of cases, yes. We need to precisely distinguish which considerations boil down to an amendment of the EU treaties. You can forget those ones for the time being. A lot of politicians are recklessly throwing things into the debate and describing them with pleasant-sounding terms, but they aren't going to be things that happen fast. Standing in the way of a swift realization of these ideas are ratification proceedings and referendums, which would take place within the context of a general mood of euroskepticism in many countries.

SPIEGEL: Does that not also apply to euro bonds?

Steinbrück: Heads of government could also take de facto action themselves to introduce euro bonds, but then you don't have a European institution that issues them and checks the conditions attached to them and imposes sanctions when they aren't met. That would be a very important precondition for agreeing to euro bonds.

SPIEGEL: The Social Democratic Party (SPD), which you are a member of, has been touting euro bonds as the solution to the euro problems ...

Steinbrück: … and, of course, that's not wrong.

SPIEGEL: … without saying that the euro bonds couldn't be made available at any point in the foreseeable future.

Steinbrück: That's why I am here as a representative of the SPD to explain things in a differentiated way. None of us is claiming they'd be a panacea.

SPIEGEL: We've established, first, that there will be a long and acrimonious debate over the advantages and disadvantages of euro bonds and, second, that they won't be available for some time to come. So, what's supposed to happen in the meantime?

Steinbrück: Well, of course, although they just don't want to admit it, the governments have already agreed to something that closely approximates euro bonds. The European Financial Stability Facility (EFSF) bailout fund is supposed to be able to directly purchase sovereign bonds from banks ...

SPIEGEL: ... to prop up their market values and calm the markets.

Steinbrück: But what's going to happen if one of these countries can't pay back these sovereign bonds? In that case, euro-zone countries are going to be held liable on a proportional basis. That means entering a union based on shared liability. (Chancellor Angela Merkel) just can't admit that because it would cause half of her parliamentary group to go through the roof. This duplicity bothers me.

SPIEGEL: Can the means already thrown at this crisis contain it long enough for the EU treaties to be amended and for the euro bonds that you are also touting to provide some relief?

Steinbrück: Well, the honest answer is: I don't know.

SPIEGEL: If necessary, would you also argue for euro bonds even without amendments to the EU treaties?

Steinbrück: If we can't stabilize conditions with the measures already taken, there's no question we'll be having this debate.

SPIEGEL: If that happens, do you also think the European Central Bank (ECB) will continue purchasing sovereign bonds?

Steinbrück: I've always been opposed to that because the ECB should limit itself to its monetary policy function. But I'm not going to criticize the ECB: Political actors' failure to take action in May 2010 forced its hand. Still, it now has €129 billion worth of sovereign bonds on its books -- and the risks that come with them. I'm in favor of having these sovereign bonds transferred to the EFSF.

SPIEGEL: If the EFSF takes over these €129 billion worth of bonds and continues to purchase other sovereign bonds, it will soon hit the limit of the means at its disposal. Will its funding then need to be increased?

Steinbrück: I'd prefer not to say anything now that's going to ruffle everyone's feathers again.

SPIEGEL: If national parliaments don't approve the measures that were agreed to at the July 21 euro crisis summit in Brussels by the end of September, the ECB will be forced to step in once again. Some politicians might even view that as the best of all worlds because the ECB's ability to print its own money when necessary gives it unlimited firepower.

Steinbrück: If we really haven't legitimized the European Council's July 21 decisions by the end of September, a completely different scenario will unfold: It would mean that Greece doesn't get any more money. It won't be able to pay any more salaries or pensions. Greek banks will fall. Many Greeks will move their money abroad. Then we'll really have to brace ourselves for trouble.

SPIEGEL: Do you think that's a likely scenario?

Steinbrück: No. It won't get so far -- because we can't let it.

SPIEGEL: But what happens if the so-called "troika" -- that is, inspectors from the IMF, the ECB and the EU -- come to the conclusion in the next few days that Greece's efforts to fulfill the conditions tied to the aid payments aren't serious enough? If that happens, should the next tranche of aid for Greece still be paid out?

Steinbrück: There's no more place in the euro zone for well-meaning laxness when dealing with deficits and failings. If the demands on Greece aren't taken seriously, we'll get stuck in quicksand. In the worst case, this would make it acceptable for one tranche to not be paid out. It is in the Greeks own interest not to test that.

SPIEGEL: Will Greece be able to remain in the currency union in the long run?

Steinbrück: That's something Greece will have to decide for itself.

'There Isn't a Single Measure that Is Going to Solve All Problems'

SPIEGEL: There also seems to be a lack of political will in Italy to put its budget in order. Will Italy become the new Greece?

Steinbrück: Italy is fully capable of tackling its difficulties. Its problem is purely political -- and it has a well-known name.

SPIEGEL: Bigger bailout funds, euro bonds, purchasing sovereign bonds and whatever else may come: Is it possible that the price Germany will have to pay for Europe will be too great in the end?

Steinbrück: Nobody knows. We have yet to pay a single cent; we've only given guarantees. In these conditions of extremely high insecurity, we must act in a way that is politically responsible -- for the sake of both Germany and Europe. It's just that the government needs to explain that to the Germans. Over a period of 20 years, German reunification has cost €2 trillion, or an average of €100 billion a year. So, we have to ask ourselves: Aren't we willing to pay a tenth of that over several years for Europe's unity?

SPIEGEL: A tenth just won't get us there.

Steinbrück: How do you know? It annoys me that some economic institutes claim that introducing euro bonds would cost Germany between €20 billion and €25 billion over 10 years ...

SPIEGEL: … the Munich-based Ifo Institute for Economic Research says it might even cost €47 billion over the long-term -- and that's per year.

Steinbrück: That is just nonsense. Throw those studies in the trash can! They fail to take into account how demand structures change. A euro-bond market would be the second-largest one and the most liquid market for sovereign bonds after the dollar. It would be attractive to the Chinese, for example, who really could diversify their investment strategy. That would push down interest rates.

SPIEGEL: Would that put the speculators out of business?

Steinbrück: There isn't a single measure that's going to solve all problems. Even with euro bonds and all the other measures, the markets won't calm down unless Europe tackles the key problem of state indebtedness.

SPIEGEL: Is it realistic to expect that the things you advocate will be done?

Steinbrück: I think it's realistic because the pressure to solve the problem has become so great and it's become clear to many of those involved that muddling through things isn't going to bring the situation under control. We've lost a lot of time, and that's also because the chancellor has done a lot of pirouettes along the way, beginning with the statement: "The Greeks won't get a single cent."

SPIEGEL: Those around Chancellor Merkel justify their hesitant stance toward providing aid to Greece by saying that it has been the only way to force the Greeks to make concessions.

Steinbrück: That's just looking back on scheming and stumbling and calling it a strategy.

SPIEGEL: What would you have done differently?

Steinbrück: There should have been a very early signal that the community of European states wouldn't allow the common currency to be shot down. It really surprised me that (Germany's) government didn't stage an appearance at that time like the one that Ms. Merkel and I made in October 2008 to guarantee private German bank deposits. Germany's chancellor, France's president, the president of the ECB, the head of the euro group, the president of the European Commission -- all of them should have stood up and declared: "We won't let the euro zone be attacked. The sovereign bonds that have been issued are safe." And then they should have provided a framework for how these commitments would be underpinned.

SPIEGEL: You mean a general guarantee for government bonds?

Steinbrück: Yes, but this guarantee would naturally be tied to strict conditions for the affected countries.

SPIEGEL: Do you have any explanation for why the government's crisis management in the second part of the financial crisis has been so much worse that it was in the first part?

Steinbrück: One explanation -- and one that's admittedly flattering to the SPD -- is that the personnel in place at the time were better. Unlike today's makeup, there were several strong members in the cabinet of the grand coalition. (Ed's note: The Grand Coalition was the coalition government that ruled Germany between 2005 and 2009 with Chancellor Merkel's center-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), as the senior partners and the center-left Social Democratic Party (SPD) as the junior partner. Following the 2009 elections, the CDU/CSU formed a new coalition with the business-friendly Free Democratic Party (FDP).)

SPIEGEL: Can we really blame the sovereign debt crisis on the financial crisis?

Steinbrück: No, but it aggravated it; it was like a catalyst.

'Politicians Have Become Susceptible to Blackmail'

SPIEGEL: When you look at financial-market actors, do you see anything resembling insight into what they have caused?

Steinbrück: Individual ones might sense they are sawing off the branch they're sitting on. But most of them have no sense that every exaggeration and everything that is glaringly unfair triggers a countermovement. This can even get violent, as one has been able to see in England. I resent the protagonists who profit from this system -- some of them with dizzying sums -- for not having a sense of proportion and moderation, of balance and fairness, and for carrying on as before.

SPIEGEL: But shouldn't the state set limits to prevent these kinds of excesses?

Steinbrück: Of course. But I don't see the organizations of financial capitalism up to and including the Institute of International Finance itself working ambitiously and proactively on devising rules that could have moderating and stabilizing effects. But the underlying issue is whether this kind of financial capitalism is headed toward a moral crisis and, if so, who's in charge. Is it the politicians? Or is it the completely anonymized, unrestricted financial markets, which are working toward having profits privatized and losses socialized?

SPIEGEL: What's your answer to that question?

Steinbrück: Politicians have become susceptible to blackmail. Financial-market actors are constantly telling us: "If we don't pay high bonuses, we'll lose the best people. If you don't support us, there will be shocks that sweep your legs out from beneath you." This is how politicians are disciplined and the status quo remains frozen.

SPIEGEL: At such a historic hour as this, why isn't there a grand coalition?

Steinbrück: Because the SPD didn't get any political return for the good work it did as part of the grand coalition.

SPIEGEL: That's not really a good argument if we're really dealing with an historic hour.

Steinbrück: We're not dealing with a national crisis in which the SPD has to follow the principle of "country first, party second." If this government is facing political bankruptcy, then it should call an election.

SPIEGEL: Do you think the government will be able to secure a majority of support from within its own ranks when parliament votes on the expanded bailout fund?

Steinbrück: Yes, the disciplinary effect will be very big. If it can't get its own majority, the government will of course have its back up against the wall even more.

SPIEGEL: One last question: If new elections are held, who would the SPD put up as its candidate to become chancellor?

Steinbrück: Didn't we want to go to lunch now?

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

Interview conducted by Armin Mahler and Georg Mascolo


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