Built on a Lie The Fundamental Flaw of Europe's Common Currency
Part 4: Opposed to Monetary Union
The public was also not particularly enamored of the idea of a European monetary union. Sixty percent of Germans were opposed to it. One of their fears was that they would eventually be held liable for the debts of financially unsound member states.
The politicians in Bonn, aware of the concerns of their citizens, did everything in their power to provide additional safeguards for the European currency. For one, they incorporated a clause into the Maastricht Treaty that stated that no EU nation was permitted to pay the debts of another. In addition, the then-German Finance Minister Theo Waigel pushed for the so-called Stability Pact.
Only financially sound nations were to be accepted, and to satisfy this criterion, the pact stipulated so-called stability criteria for the member states. Under these criteria, no country was permitted to accumulate debts exceeding 60 percent of its gross domestic product. In addition, member states were only permitted to take on new debt if the scope of the loans did not exceed 3 percent of their GDP. "Three point zero is three point zero," Waigel's rule stated. Violations were to be rigorously punished.
Not surprisingly, the Germans were skeptical when the euro was introduced on Jan. 1, 1999, initially as an accounting currency, at an exchange rate of $1.1789. The notes were issued three years later, in the biggest monetary exchange program in human history. In a ceremony at Berlin's Brandenburg Gate, DJs played records as then-Finance Minister Hans Eichel exchanged 200 old German marks into brand-new euros.
To the Germans' surprise, the new money proved to be an economic bonanza at first. The monetary union created a common economic zone, which now includes 16 countries and 320 million people. Prices remained stable and, perhaps most importantly, the euro established itself as a second reserve currency next to the US dollar.
All of Europe benefited from the new currency, but no other country gained quite as much from the euro as Germany, for many years the world's leading exporter. In the past, German industry had been forced to accept heavy losses whenever the Italian lira or the French franc was devalued once again, automatically making German goods more expensive. The euro, on the other hand, even guaranteed German exporters stable prices in a turbulent global economy. During the most recent financial crisis, for example, the common currency "proved to be beneficial," says German constitutional law expert Paul Kirchhof.
From the very beginning, however, the euro was actually far more vulnerable than investors and politicians were willing to admit. Several member states used the façade of a strong global currency primarily to blatantly live beyond their means. They accumulated enormous mountains of debt and immersed themselves in a bizarre competition to circumvent the European stability rules as cleverly as possible.
Ironically, it was the Germans who proved to be particularly creative. On one occasion, then Finance Minister Theo Waigel tried to raid the gold reserves of the Bundesbank. Another time, his successor Hans Eichel sold part of the government's stakes in Deutsche Post and Deutsche Telekom to private investors. Both measures were intended to artificially spruce up Germany's debt statistics. It was Germany, of all countries, that was the second member state after Portugal to be subjected to an excessive deficit procedure by the European Union.
'Sickly Premature Birth'
In actual fact, the Brussels-based Commission should have set the sanction mechanism in motion earlier than it did. But then Chancellor Gerhard Schröder, who had once denigrated the euro as a "sickly premature birth," promised improvement. By ingratiating himself around Europe, the chancellor long managed to avoid being sanctioned.
It was Schröder's finance minister who, in light of a pending EU excessive deficit procedure against Germany, achieved an "improvement in the implementation of the Stability and Growth Pact" at a special meeting of the Ecofin Council on March 20, 2005. The lofty title was more than misleading, however. After the meeting, "exceptional and temporary" violations of the deficit reference value could occur much more frequently than in the past.
The Bundesbank ruled that the changes would "decisively weaken the rules of sound financial policy." As a consequence, the central bank wrote, "the goal of achieving sustainable public finances in all member states of the monetary union is being jeopardized."
By that point, the pact had clearly been weakened. The infractions accumulated, as did the tricks used by members of the monetary union to satisfy the stability criteria: Revenues were antedated, expenditures were concealed and debts were hidden.
Since joining the euro zone, the 16 euro countries have violated the deficit rule, under which net new debt cannot exceed 3 percent of GDP, 43 times. Most of the infractions have occurred in the last two years. Greece is at the top of the list of violators. Only once did the country manage to push its deficit rate below the magic limit, and only with an extremely creative trick: The Greeks sugarcoated their statistics by including prostitution, black-market trade and gambling in the calculation of economic output. As a result, GDP rose by a stunning 25 percent in 2006, and the deficit dropped to 2.9 percent.
Major investment banks also played a key role in fudging the numbers. With the help of complex financial instruments, the Greeks obtained additional loans that did not appear in the Eurostat deficit statistics. The concealed borrowing centered around so-called swaps "with which the Maastricht rules can be circumvented, completely legally," says a trader with one bank.
In early 2002, the US bank Goldman Sachs provided the Greeks with an additional loan for roughly $1 billion, triggering a wave of indignation throughout Europe. Even German Chancellor Merkel was outraged, saying that it would be "a disgrace if it turns out that banks, which have already taken us to the brink of disaster, were also involved in the falsification of statistics in Greece."
Cosmetically Enhancing Debt
Merkel could soon have even more reason to be outraged. A year after the Goldman deal, Deutsche Bank's London office set up a questionable deal for the Greeks. Together with the government financing division of Eurohypo, now a subsidiary of Commerzbank, it provided Athens with a loan for the purchase of military equipment.
"In 2003, Eurohypo took over a loan to the Greek government worth around 1 billion, which was repaid last year," confirms a Eurohypo spokesman. "The transaction was based on two swaps, which a bank in London had made available to the Greek government."
Deutsche Bank is unwilling to comment on the details of the transaction. Behind the scenes, it is said that Eurostat investigated the deal, and its goal was never to engage in cosmetically enhancing debt -- even though it can hardly be denied that this was precisely what the deal was intended to achieve. It meant that the Greeks did not need to enter the loan in its books right away, but only several years later, when the weapons were delivered.
- Part 1: The Fundamental Flaw of Europe's Common Currency
- Part 2: Unpalatable Alternatives
- Part 3: Going In for the Kill
- Part 4: Opposed to Monetary Union
- Part 5: Drifting Apart