Merkel and the Euro Is Germany's Finance Minister Going Rogue?

He used to be regarded as Germany's safest pair of hands when it comes to the euro crisis. Now, criticism of Finance Minister Wolfgang Schäuble is growing within the government parties. Some believe that Schäuble wants to exploit the crisis to push through his vision of a United States of Europe. By SPIEGEL Staff.
Wolfgang Schäuble before the Bundestag debate on the EFSF expansion on Sept. 29.

Wolfgang Schäuble before the Bundestag debate on the EFSF expansion on Sept. 29.

Foto: JOHN MACDOUGALL/ AFP

A pall of silence fell over the German parliament as Finance Minister Wolfgang Schäuble went up to the lectern last Thursday. The debate over the expansion of the euro backstop fund, the European Financial Stability Facility (EFSF), had already been going on for over an hour. Previous speakers addressing the Bundestag had tried their hand at a number of different roles. Schäuble's predecessor in office, Peer Steinbrück of the left-leaning Social Democrats (SPD), had tried to present himself as a European statesman, whereas Rainer Brüderle, the parliamentary floor leader for the business-friendly Free Democratic Party (FDP), had vehemently attacked the opposition.

Now, it was the turn of Schäuble, a member of the center-right Christian Democratic Union (CDU). He feigned the honest broker who tries to mediate between the parliament's legitimate demand to have a say in such important matters and the exigencies of international political crises. "No one here sees this as an easy decision," he said. The question at hand, he continued, is whether politicians are capable of "controlling these developments."

The government, it seems, is certainly able to exercise control, at least when it comes to maintaining discipline within its own ranks. German Chancellor Angela Merkel and Peter Altmaier, the conservatives' parliamentary secretary, exchanged congratulatory text messages after winning the key Bundestag vote  on the euro bailout fund: "Our efforts paid off."

Two things became clear at the end of last week -- a week that many pundits had prematurely predicted would spell the end of the center-right coalition of the CDU, its Bavarian sister party the Christian Social Union and the FDP. First, the government can rely on its own parliamentary majority to push through euro bailout legislation -- at least for the time being. Second, Merkel's finance minister, of all people, has sown doubt about the government's crisis management. In the days running up to the vote, Schäuble needlessly fueled a debate over expanding the euro backstop fund, and his comments sparked renewed tensions within the coalition.

Keeping His Cards Close to His Chest

FDP parliamentarians have long been convinced that the finance minister is not playing with an open hand, and that he would prefer to force them out of the coalition. But there has also been an increasing amount of discontent over Schäuble among the ranks of the CDU/CSU parliamentary group. Quite a number of his fellow conservatives accuse him of undermining their rights as parliamentarians and forging agreements on a European level that he largely keeps under wraps at home. The CSU even suspects that the finance minister is paving the way for a European super-state, something that the Bavarians strongly oppose.

This criticism is directed at one of the last political heavyweights in Merkel's cabinet. For months now, Schäuble has topped the opinion polls as one of Germany's most popular ministers. No one else on the nationwide political scene enjoys such high regard, even across party lines. The Germans believe that if anyone can steer the country through the perils of the euro crisis, it's Schäuble, with his extensive experience in political maneuvering. The veteran party and parliamentary group leader stands at the twilight of his career and doesn't have to prove anything to anyone anymore -- and is not aspiring to any position.

This makes him a formidable figure, but it also feeds his longstanding tendency toward arrogance and his penchant for political intrigues. Many conservative parliamentarians, regardless of their position on the common currency, feel as if they are being treated with contempt. His statements made during the euro crisis have rarely been unequivocal; he always leaves himself a way out. Not only does this confuse his political friends and foes, it also flusters the financial world, with its propensity for panic.

Many German politicians are also insinuating that he has a hidden agenda. They fear that one of the last fully committed supporters of the European project is taking advantage of the crisis to advance his dream of a United States of Europe -- at almost any price. Even the chancellor is sometimes annoyed by the finance minister's moves.

Pithy German Wisdom

Schäuble's antics last week were a perfect example of his modus operandi. It began with business as usual. At the fall meeting of the International Monetary Fund (IMF) and the World Bank in Washington, the finance minister used quaint German phrases to broach the topic of the crisis in the euro zone. Referring to the fact that every country in the monetary zone is first and foremost responsible for the soundness of its own finances, he recited a quotation by Goethe: "Let everyone sweep in front of his own door, and the whole world will be clean."

Schäuble finds himself irresistible at such moments. He is not bothered by the fact that foreigners and representatives of the international media who he is addressing have no idea what to make of such Teutonic pearls of wisdom.

To make matters worse, Schäuble often doesn't even adhere to his own admonishing axioms. "Silence is golden," he decreed in Washington, a reference to the need to avoid panicking markets with loose talk. But then he heedlessly allowed himself to be drawn into a dangerous debate over whether the EFSF could get a banking license and leverage its assets to borrow even more money from the European Central Bank (ECB).

Most of his German predecessors in office would have rejected such notions with indignation and referred to Germany's traumatic experiences during the 20th century, when governments printed money to finance public expenditure, causing the value of the currency to plummet.

Merkel Intervenes

Not once, however, did Schäuble clearly reject the proposals, which had been spearheaded by his American counterpart, US Treasury Secretary Timothy Geithner.

Instead, he talked about alternatives to a banking license, which would make it possible to achieve similar leverage effects. Schäuble did not exactly say just what these alternatives might be, but he did mention that Berlin is considering bringing forward the launch of the European Stability Mechanism (ESM), the permanent bailout fund for the euro zone, from 2013 to 2012.

In addition to being imprudent, Schäuble's comments showed bad timing. Ironically, during the very week in which the coalition was struggling for a parliamentary majority to extend the reach of the euro backstop fund, Schäuble was publicly contemplating yet another reform of the initiative.

German Vice Chancellor Philipp Rösler, the leader of the FDP, is appalled. "Granting a banking license to the European bailout fund would be the wrong approach," he says, adding that such a step could be interpreted as a sign "that the finance minister has been given a license to print money."

It took an intervention by the chancellor herself to clear up the matter. She informed Schäuble that there would be no solution that involved integrating the ECB.

Concealing His True Intentions

The chancellor and her supporters had spent weeks ensuring that the center-right coalition government could muster an outright majority in favor of the euro backstop fund. In exchange for their votes, parliamentarians were offered significantly greater oversight of EFSF operations. Everything was going well -- until the finance minister made his botched appearance in Washington.

Just how much is at stake for the chancellor was made clear by a comment that she made, almost in passing, as she ended her speech to the conservatives' parliamentary group last Tuesday. Merkel told them that she didn't want to be dependent upon the votes of the two main opposition parties, the SPD and the Greens, who had both pledged to support the bill. Then, she made a direct appeal to her parliamentarians, saying she couldn't allow that to happen because "I still have far too many plans for us." In other words: She wants to continue to govern with the current coalition.

However, there has long been much speculation within the ranks of the coalition over whether the finance minister shares that goal. Schäuble has repeatedly indicated his support for a so-called grand coalition with the SPD, similar to the one that ruled German between 2005 and 2009. His ongoing tendency toward secrecy has caused much consternation within the coalition. Recently, for instance, the finance minister only shared his first draft for the new EFSF agreement with the parliamentary floor leaders of the different parties and a number of interested politicians. By contrast, Schäuble didn't say a word about it to the CDU/CSU parliamentary group. A senior member of the parliamentary group caustically commented that Gregor Gysi, the floor leader of the far-left Left Party, "knew about it before Schäuble's own colleagues in the CDU."

Once again, the coalition parliamentarians had the feeling that they were the last ones to be informed by the minister. And, once again, they discovered that Schäuble was using a torrent of words and statements in an attempt to conceal what he is really planning and thinking.

Bag of Tricks

Schäuble's political style is also characterized by a good deal of posturing. No other politician in Berlin can so convincingly play the innocent bystander, and no one is better than the finance minister at deflecting attention from his own mistakes.

Last Thursday, as the entire country was talking about the idea of leveraging the bailout fund, he profusely vented his indignation in front of the FDP parliamentary group about others who had supposedly broached this dangerous issue. He told them that he was "exceedingly" annoyed that Olli Rehn, the European commissioner for economic and monetary affairs, was making "such proposals." Then he spelled out his position: "We are not increasing the scope of the fund; we are merely safeguarding the €440 billion." This still leaves Germany with a liability risk of €211 billion, he said. "I am not committing to anything beyond that, just so you don't later accuse me of telling you something that isn't true."

That certainly sounded convincing, but Schäuble had merely demonstrated another tactic from his bag of tricks as a seasoned politician: the denial that isn't actually a denial. At issue here was not whether the fund would be expanded even further, but whether there were plans to pursue clever leveraging with the volume available. "On Thursday, the parliamentarians were voting on a black box," says CDU financial expert Manfred Kolbe, who voted against the EFSF ratification.

Indeed, it is now already clear that, along with the planned guarantees for €440 billion, a considerably larger sum of money will also be mobilized among banks and insurance companies to support, if necessary, Italy and Spain, should Greek Prime Minister Georgios Papandreou be forced to declare his country bankrupt.

Increasing Risk

It would work like this: The EFSF fund would promise investors that if they purchase Italian or Spanish government bonds it would cover, say, up to 20 percent of their loses. This would render the bonds from these countries more attractive to investors, making them more willing to make fresh money available.

The effective financing volume of the bailout fund would thus increase fivefold. If the fund were to cover 25 percent of losses, the firepower of the EFSF would be ramped up by a factor of four. What makes this solution so appealing is that, according to government lawyers, the entire process could take place within the legal framework of the euro backstop fund, and its regulations would not have to be amended and passed by the Bundestag again. The approval of the parliament's budget committee would suffice. Nevertheless, this approach would further increase the government's credit risks.

Furthermore, the idea of granting the EFSF access to money from the central bank is still on the table, despite the fact that Merkel has tried to put a lid on the issue. Schäuble has been extremely coy about revealing his preferences, but others are openly calling for the move. Within the European Commission, Olli Rehn is the staunchest backer of this scheme, while among the member countries of the monetary zone the idea is embraced by France and the ailing peripheral countries.

Just Amend the Treaties

The notion is certainly not opposed by everyone at the ECB, either. The head of the Austrian central bank, Ewald Nowotny, is open to this approach, ECB Vice President Vítor Constâncio from Portugal supports it, and future ECB President Mario Draghi, an Italian, has no objections.

By contrast, current ECB President Jean-Claude Trichet rejects it, along with Jens Weidmann, the president of the German central bank, the Bundesbank. It is also opposed by Jörg Asmussen, the ECB's future chief economist, who is currently serving as a state secretary in the German Finance Ministry. Not even Klaus Regling, the German in charge of the Luxembourg-based EFSF, likes the idea.

Opponents of the scheme have legal concerns. They say that such a plan violates European treaties that prohibit the ECB from propping up national finances.

Schäuble remains undeterred by such objections. If need be, he says, the treaties simply have to be amended. He sees Europe's current crisis as merely a stage on the road to even greater integration.

'European Dreams'

Not only is the FDP shying away from Schäuble's course, but the CSU is also annoyed. This was patently evident at the meeting of the CSU parliamentary group last Monday. The finance minister's comments in Washington were still fresh in everyone's mind, and the mood was understandably dour. Bavarian governor and CSU leader Horst Seehofer was irked that Schäuble had once again propagated his vision of a United States of Europe. Seehofer knows that this position is unpopular at home. In fact, Bavaria even amended its state constitution to make it perfectly clear that the CSU would only accept a "Europe of regions," said Seehofer.

This was followed by a statement that couldn't have been clearer: "Thus far and no further," the CSU leader proclaimed. He is concerned that the euro bailout policies in Berlin could jeopardize his party's success in the upcoming Bavarian state parliamentary election.

The CSU is still trying to pin Schäuble down. "It's still unclear to me what the German finance minister is angling at," says Georg Nüsslein, the economic policy spokesman for the CSU parliamentary group. "If Schäuble wants to realize his European dreams in this crisis, then he is no longer doing his job justice."

Schäuble's fellow cabinet member, German Interior Minister Hans-Peter Friedrich, who is also a member of the CSU, has clearly distanced himself from the finance minister. "Anyone who concludes from the current debt crisis that European centralism now has to be bolstered has embarked on the completely wrong path," he says. All across Europe, even in Germany, there is a growing sense of euroskepticism, he adds. "This cannot be countered by stripping even more powers from democratically elected national parliaments and governments."

The government may have survived yet another vote last Thursday, but the hurdles will be even higher next time around.

REPORTED BY LAURA GITSCHIER, PETER MÜLLER, CHRISTIAN REIERMANN AND MICHAEL SAUGA

Translated from the German by Paul Cohen
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