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

German Finance Minister Wolfgang Schäuble talks to SPIEGEL about efforts to save Greece from bankruptcy, plans to reform the euro zone and the need to further regulate the financial sector.

SPIEGEL: Mr. Schäuble, we are conducting this interview at your bedside in a Berlin hospital, where you have spent the past two months, with a short interruption. How do you feel?

Wolfgang Schäuble: Better. The wound I was left with after a routine operation has almost healed. However, I'm unable to sit up, which is a problem for a paraplegic. (Editor's note: Schäuble has been confined to a wheelchair since a 1990 assassination attempt.) I have to stay in bed so that the scar doesn't open up again.

SPIEGEL: Why is the healing process taking so long?

Schäuble: I left the hospital too early, against the advice of my doctors. I wanted to travel to Brussels to attend a meeting on the crisis in Greece. Now I prefer to listen to the doctors' advice and will stay in the hospital for as long as it takes. However, I do hope that I'll be sitting at my desk again by Monday, when this interview appears in print.

SPIEGEL: Let's talk about Greece and the euro crisis.  In 1992, a prominent member of Germany's center-right Christian Democratic Union, to which you belong, made the following promise to German citizens: "If a country accumulates high deficits as a result of its own behavior, neither the (European) Community nor a member state is obligated to help that country." Do you know who said that?

Schäuble: A lot of people could have said that.

SPIEGEL: It was the current German president, Horst Köhler, who negotiated the terms of the European Monetary Union (EMU) at the time, in his capacity as a senior official in the German Finance Ministry. Does the sentence still apply today?

Schäuble: I'm a firm believer in the monetary union. At the time, I felt exactly the same way as the current president. The only problem is that the world has changed. The capital market has become globalized to a degree that we couldn't have imagined at the time. And we have experienced a financial crisis from which we in Europe must draw a clear lesson: We cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers.

SPIEGEL: You are exaggerating. In past years, it's happened again and again that a country couldn't pay its debts, and yet that hasn't led to a collapse of the global financial system. Why should this be different in Greece's case?

Schäuble: Because Greece is a member of the European monetary union. Greece's debts are all denominated in euros, but it isn't clear who holds how much of those debts. For that reason, the consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank.

SPIEGEL: But in a bid to prevent a national bankruptcy, you are accepting the breach of European agreements. Those agreements expressly exclude the possibility of bailout payments to other countries.

Schäuble: That's not quite correct. It is true that no member state can be required to make payments to others. But if countries want to offer voluntary assistance, as in the Greek case, this isn't only allowed, but it's also in Germany's interest. We all benefit by ensuring the stability of the euro zone.

SPIEGEL: That's not how German citizens have understood the monetary union. They were assured that the euro would be as stable as the German mark. Now their tax money is going to a country in which a quarter of the population works in the public sector and pensions are often higher than salaries. Is this the way to boost confidence in the euro?

Schäuble: I would caution against fueling cheap populism. First of all, every German who has spent a vacation in Greece knows that the standard of living there isn't higher than it is in Germany. Second, Greece is paying a high price for European assistance.

SPIEGEL: Nevertheless, for months the German government was vehemently opposed to government bailouts for Greece. Why did you give in and agree to the EU rescue plan  that was recently hammered out and which will involve Germany forking out €8 billion ($10.7 billion) if Greece goes belly up?

Schäuble: We didn't give in. We have always said that before we talk about assistance, Greece has to do its homework first. Meanwhile, the Greek government has approved a credible austerity program that involves serious cutbacks for its citizens, and it even had to step up those measures recently. This is why the German government is now prepared to take on responsibility at the European level.

SPIEGEL: We understood the chancellor's words differently at the time.

Schäuble: That must be your interpretation.

SPIEGEL: But we weren't the only ones. Merkel was referred to as "Madame Non" throughout Europe, because in Brussels she was fundamentally opposed to German aid for Greece.

Schäuble: That description was completely erroneous. The chancellor has consistently said that we are willing to provide assistance as a last resort, and that was how we went about it.

SPIEGEL: In other words, you were playing poker.

Schäuble: Playing poker is the wrong expression. The situation is too serious for that. Germany has embraced its leading role in Europe. We will help Greece in the event that its government, despite a comprehensive restructuring program, falls victim to international currency speculation once again.

'We Are Prepared to Do What Is Necessary'

SPIEGEL: But ordinary Germans saw it differently. They understood Merkel the same way that the newspaper Bild put it: "The Greeks get nothing."

Schäuble: That was an exaggerated way of putting it, and it was never correct. Having an effective Europe, both politically and economically, is the best way to provide for the future of Germans. The monetary union is more beneficial to us and our export industry than to anyone else. That has to be reiterated again and again, even if the opinion polls tell us it isn't a popular view.

SPIEGEL: But the chancellor created the impression that she was paying more attention to polls than to anything else.

Schäuble: The chancellor doesn't just have to defend her decision in Brussels. She also has to make sure that we obtain a parliamentary majority in Germany.

SPIEGEL: In other words, you're claiming that in the end Merkel and yourself placed on the table only what was absolutely necessary -- and only at the last moment.

Schäuble: We are prepared to do what is necessary, and to do so at the right moment.

SPIEGEL: The only problem is that hardly anyone believes that the restructuring of Greece will succeed. The austerity measures are already hitting the Greek economy hard.

Schäuble: If you live beyond your means and have to restructure as a result, you pay a price. It wasn't any different in Ireland or in Estonia. These consequences are also, however, an incentive to enforce sound policies.

SPIEGEL: The Greek crisis is particularly controversial, because there are other euro countries that are also up to their necks in debt. What happens if Portugal or Italy requests financial assistance next?

Schäuble: There are no indications that this will happen, which is why no finance minister would answer such a speculative question. If he did, he wouldn't be doing his job well.

SPIEGEL: Would it be conceivable for Europe to not come to the aid of a country like Spain, after having created a precedent by rescuing Greece?

Schäuble: We have to prevent systematic risks in Europe. The right framework for this already exists. It's the EU's Growth and Stability Pact, which calls for strict sanctions when member states get too heavily into debt.

SPIEGEL: But the pact never worked, because the euro zone countries have circumvented it again and again.

Schäuble: We have to restructure the pact with better rules. We're working on that right now. European Council President Herman Van Rompuy has already announced an initial meeting of a task force that will discuss the relevant proposals. I am pleased that I will be part of this commission.

SPIEGEL: Many economists say that Europe could not cope with a second case like Greece. Do you disagree?

Schäuble: I believe that these economists haven't really understood that they are fueling the business of dubious speculators. Greece's situation cannot be compared with that of other countries at all. There were consistent problems with the figures there, and we could ask ourselves whether the European statistical office should have noticed this earlier.

SPIEGEL: But the EU's critical error, from the very beginning, was that the European finance ministers were the ones deciding on the sanctions. That meant that the perpetrator and the judge were identical.

Schäuble: There is something to that, but we shouldn't make it too easy for ourselves and point fingers at others. After all, Germany, under a Social Democratic- Green coalition government, repeatedly exceeded the 3 percent ceiling and then watered down the pact under my predecessor Hans Eichel.

SPIEGEL: EU Monetary Affairs Commissioner Olli Rehn has proposed establishing a fund for other imminent national bankruptcies. What do you think about that?

Schäuble: If we need a procedure for cases similar to Greece's, we also have to discuss the question of how we can have the creditors assume some of the costs. Whenever a company declares bankruptcy, the creditors must abandon some of their claims, and it should be the same way in a bankruptcy proceeding for a country. Resolving this problem is the most important thing, because speculation will no longer be worthwhile once it's been resolved. But you don't need a fund for that, just clear regulations.

'We Will Continue to Fight for Regulations for the Financial Markets'

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.

Interview conducted by Georg Mascolo, Wolfgang Reuter and Michael Sauga
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