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Berlin Divided on Greece Merkel Takes on the EU and Her Own Finance Minister

In Berlin the chancellor is at loggerheads with her finance minister over the Greek debt crisis, in Brussels and Paris she faces attacks about Germany's export successes. Yet Angela Merkel is confident of victory and her uncompromising position is popular with the German people.

It was shortly before noon on Friday of last week, as German Chancellor Angela Merkel strolled past the government bench in the German parliament, the Bundestag, distributing signs of her goodwill. Justice Minister Sabine Leutheusser-Schnarrenberger received a friendly greeting and Economics Minister Rainer Brüderle got an encouraging pat on the shoulder.

But her features froze when she saw Finance Minister Wolfgang Schäuble. She shook his hand briefly and nodded without saying a word. A short time later she approached Schäuble, who is in a wheelchair, said something into his ear with a serious expression on her face and, as if to add emphasis to her point, tapped on Schäuble's desk with a pen. Schäuble avoided making eye contact and stared straight ahead.

At the moment, there is little evidence of harmony in the relationship between the two most important members of the German government. In the past, Merkel and Schäuble have represented more than just the central axis of power in the cabinet. The two were also seen as insurance against the ongoing chaos in the coalition government of Merkel's center-right Christian Democratic Union (CDU) and the pro-business Free Democratic Party (FDP), a guarantee that reason would ultimately prevail on the key questions of budgets, taxes and government finances. As long as these two politicians could agree, that is.

Clash Over German Leadership in Europe

But doubts have now been raised over that very consensus between Merkel and Schäuble, specifically when it comes to one of the central questions of German politics: the future of the European Monetary Union, in the light of the growing economic tensions in the euro zone and a possible bailout for debt-plagued Greece.

The finance minister sees the euro as proof of Europe's integration ability, and he is willing to use German government aid to rescue Greece, if necessary. This is precisely what Merkel wants to avoid at all costs, which is why she favors intervention by the International Monetary Fund (IMF).

The conflict is about more than how best to handle a European country that is deeply in debt. It is also a question of power, as Schäuble and Merkel clash over the German leadership role in European politics.

Officially, the chancellor insists that she is "completely in agreement" with her finance minister. But close associates of both politicians say this is not the case. Senior officials in the Berlin government and at the European Commission in Brussels report deep alienation, contradictory directives and "trickery" on both sides.

The behind-the-scenes dispute recently reached its first bizarre climax. To prevent Merkel and her staff from discovering what he was thinking about before he was ready to announce it, Schäuble ordered his staff not to speak to anyone at the Chancellery. From now on, all contacts and information are to be channeled through top ministry officials. Telephone conversations and the exchange of documents now require prior approval by department heads. A ban on communication with government headquarters -- even veteran Finance Ministry officials cannot recall anything like it. Officials at the ministry say that it is "a measure to safeguard departmental authority."

The behind-the-scenes power struggle isn't just a source of irritation in the Berlin government. It also weakens Merkel's position in Brussels.

Recovered 'Sick Man of Europe'

The chancellor has been under fire from partner countries for weeks. Some are urging her to finally agree to an emergency plan for Greece, while others are complaining about Germany's export successes, which they say triggered the euro dilemma in the first place. Last week, French Finance Minister Christine Lagarde criticized the German trade surplus for being "unsustainable."

The irony is that Germany was once seen as "the sick man of Europe." Now, after painful reforms, the country is in a relatively strong position -- and yet it is forced to listen to criticism at home and abroad. Germany's European Union partners feel overrun by the Germans' dominance of exports . On the other hand, there is growing insecurity in Germany over the downsides of labor market reforms.

Merkel is determined to stand up to the pressure from her EU counterparts. No hasty aid for debt-ridden countries, and no curtailment of Germany's export strategy -- these are the positions Merkel is championing in Brussels, with a determination not unlike that of former British Prime Minister Margaret Thatcher when she demanded a rebate of British contributions to the EU.

The chancellor is taking a cool, calculating approach. Although the role of the Iron Lady doesn't necessarily make her more popular in Brussels, it does at home. A majority of Germans support Merkel's opposition to billions in new financial payments to cash-strapped southern European countries. For weeks, the mass-circulation newspaper Bild has echoed these sentiments with headlines like: "Why don't you sell your islands, you bankrupt Greeks?"

Fears of IMF Influence

It is, therefore, all the more annoying that her most important cabinet minister is only half-heartedly supporting her course of action. The conflict has become increasingly public in recent weeks, after the chancellor distanced herself from Schäuble in the plenary assembly of the Bundestag. Using the usual guarded approach she adopts for her parliamentary appearances, Merkel brought up the possibility of IMF aid for Greece. IMF intervention, she said, is "perhaps the thing that ought to be the solution now, if one were to do anything." Translation? "My finance minister is wrong."

Schäuble had already categorically rejected the idea of IMF aid, saying that he felt it would be shameful if the Europeans couldn't solve their own problems within the monetary union.

The minister is worried about political union in the EU. When the IMF provides bailout funds, its representatives typically become deeply involved in the affairs of the troubled countries in question, dictating how they should structure their financial and monetary policy. Schäuble fears that such requirements, directed at a member of a monetary union, would have an affect on other euro zone countries. But his biggest concern is that the independence of the European Central Bank (ECB) could be compromised.

Besides, the US-dominated IMF is regarded as an extension of US foreign policy, which, says Schäuble, has no place in the euro zone. For these reasons, he is willing to incur even more debt than the €80.2 billion ($110 billion) already budgeted for this year -- and to transfer more money to Greece.

The chancellor's support has been muted. Merkel wants to make it clear to the Greeks that, most of all, they need to help themselves. And she finds the willingness with which Schäuble wants to incur new debts to help Greece increasingly irritating.

She also has significantly fewer scruples than Schäuble about asking the IMF for help. "We don't have the expertise, but the IMF does," she said recently to a small group of intimates. If the IMF intervened in Greece, it would "not be an embarrassment for Europe." The opinions of the chancellor and the finance minister couldn't be more diametrically opposed.

Ill-Fated Plans

Merkel fears, most of all, an internal political debate. Something that would inevitably flare up if German taxpayer money or borrowed funds were used in Greece.

The IMF's possible involvement is only one of the bones of contention between Merkel and Schäuble. The finance minister had already irritated the chancellor with his proposal to create a Europe-wide monetary fund, based on the IMF model, which would distribute bailout funds to distressed partner countries.

The plan was ill-fated from the start. Schäuble first mentioned the idea during an interview with the national Sunday newspaper Welt am Sonntag. Merkel and her team knew nothing about the proposal, so their annoyance was all the more pronounced. While the chancellor was campaigning in Brussels against financial transfers to debt-ridden European countries, her finance minister was unveiling plans designed to facilitate those very same transfers. This created the impression that, in Berlin, the left hand didn't know what the right hand was doing.

It was embarrassing for Schäuble that officials in his ministry were unable to clear up the contradictions. Instead, they were asked to quickly patch together a concept, which their minister presented a few days later in connection with a guest article in the Financial Times Deutschland.

Schäuble's officials have now further refined their plans, but they have not coordinated them with the Chancellery, raising the possibility of new trouble between Merkel and Schäuble. The revised plans include massive financial requirements for a new, Europe-wide bailout fund -- up to €200 billion, according to the Finance Ministry experts. They have already thought about how those funds could be raised. Four options are under consideration:

  • The central banks in the Euro zone transfer a portion of their foreign currency reserves to the new fund. Gold reserves, however, are not drawn on.
  • The new fund could be authorized to borrow money in the capital markets for its bailout programs. As a result, the member states would be creating an enormous shadow budget.
  • The euro countries raise the funds through their own contributions, which would be based on economic strength. Germany would be responsible for about a fourth of all contributions, or up to €50 billion.
  • Only those countries inject capital whose budgets are out of balance. A country's contribution would then be based on the extent to which its deficit exceeds the upper limit of 3 percent annual economic output.

All of these proposals have the same flaw: They will likely trigger substantial resistance. Schäuble has found no support for his proposals among his European counterparts. He traveled to Brussels at the beginning of last week, determined to explain his ideas. But he never had the chance, because none of the assembled finance ministers was interested in Schäuble's monetary fund. The chancellor, too, offered only half-hearted encouragement, and she took every opportunity to point out that the project would require amending the European treaties.

In the language of Brussels diplomats, the language used by ECB President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker, this means: The plan is dead. Amending the treaties would take years of negotiations among the 27 EU member states, as well as ratification processes and referendums. This is something no European head of state is willing to take on anymore.

Campaign Against the 'Export Machine'

Merkel's curt reminder wasn't just a rebuff for Schäuble, but also signified a renunciation of Germany's decades-long approach to Europe. In the past, Germany was always prepared to contribute a few billions, if necessary, to promote European unity. This logic no longer applies. Germany is rethinking its financial assistance to other euro countries, particularly when the debtor nations are openly blaming Germany for their problems.

The campaign against what the Economist called the German "export machine" gathered speed last week. Representatives of the southern EU countries, in particular, held the Germans partly responsible for the economic decline of Greece, Spain and Portugal, as well as for France's problems.

Some economists, including United Nations Conference on Trade and Development (UNCTAD) chief economist Heiner Flassbeck, agree. The Germans, they argue, cause problems for their neighbors with the practice of "wage dumping."

From 2000 to 2008, unit labor costs in Greece -- and, similarly, in Portugal and Italy -- increased by 26 percent, compared with a 17-percent average increase throughout the euro zone. In Germany, however, wages increased by only a marginal 3 percent.

This created an enormous competitive advantage for the Germans, and Flassbeck isn't the only critic who says so. Peter Bofinger, a member of the federal government's council of experts, said in a SPIEGEL debate: "We were far too one-sided in emphasizing exports, while the Irish, the Greeks and the Spaniards focused much too heavily on their domestic demand."

Germany as Object of Hate?

Many Europeans now agree , and they are calling for a reversal of German wage and budget policies. "Couldn't the stronger countries do a little?" French Finance Minister Christine Lagarde asked. She argued that the emphasis should not always be placed on "enforcing the deficit principles."

What followed was a pan-European wave of support for Lagarde and criticism of Germany's economic policy. The proposals for Greece would be "perceived as a German dictate," says French economist Christian Stoffaës, and warns: "Germany must be careful not to become an object of hate in Europe."

There are widespread calls for wages and government spending to increase in Germany. This, say proponents, would increase purchasing power and raise imports.

But the government in Berlin rejects such ideas, arguing that Germany has injected close to €90 billion into the economy in the last two years in the form of economic stimulus programs and tax cuts. It is impossible to do much more, according to the German government, because the EU Commission has imposed fixed targets to reduce Germany's budget deficits. It was only on Wednesday that the EU Commission found fault with Berlin for its lack of interest in further saving measures.

It is easy to find flaws in the arguments of those who criticize Germany's export successes. Not only do they fail to recognize that Germany makes many products that are not made by any other country in the monetary union. They also ignore the fact that French products, for example, do not become more attractive because potential buyers in Germany have a few more euros in their pockets. To stimulate sales, the products would either have to be better or less expensive, and both are factors that French companies and the French government can influence.

Besides, Germany's critics act as if the government were setting wages. In reality, compensation levels in Germany are the result of negotiation between industry associations and trade unions. And these don't always lead to lower wages. In traditionally strong exporting sectors, like the automobile industry or mechanical engineering, German employees are still at the top of the wage scale internationally.

The critics, on the other hand, only set their sights on conditions in the euro zone. They ignore the fact that the competitive strength of the countries with a strong trade surplus, Germany, Austria and Finland, also has a significant impact in countries elsewhere in the world, like the United States, China and Japan -- and thereby strengthens the value of the euro.

Finding the Right Strategy

It would not do anyone any good if Germany were to change its course. The country was considered a problem case until the middle of the last decade. Were the other euro zone countries better off then? Not really.

Another frequent objection is that not every country can rely on exports to overcome its crisis. In truth, however, there is no other choice. If the imbalances in the European trade and capital balances are to be reduced, current deficit countries like Greece will have to export more goods and surplus countries like Germany will have to import more goods.

The only question is: Which is the right strategy? If Merkel prevails, Europe will be more likely to orient itself toward its top economic performers. If her critics prevail, the stragglers will become the benchmark.

The opponents will have a new opportunity next week to clarify the alternatives, when Chancellor Merkel is expecting a highly qualified guest at her cabinet meeting, someone with whom she could discuss Europe's growth and debt strategy: French Finance Minister Lagarde.

Also attending the meeting will be Lagarde's German counterpart, Schäuble, who could serve as a mediator between the two women. In addition to being of one mind on many issues, the two finance ministers are also on very familiar terms, applying the French custom of kissing each other on both cheeks whenever they greet or say their goodbyes.

Translated from the German by Christopher Sultan
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