Saturday 10 December 2016

German price for eurobonds will be strict oversight of national budgets

Days of European finance ministers breaking agreed budgetary rules are numbered -- tighter rein will apply throughout eurozone

Published 01/12/2011 | 05:00

ROOM 2400 in the German parliament has been making news here in Ireland over the past few weeks. It is from this modern, circular conference room with views over the River Spree that details of next week's Budget were leaked.

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It is also where the Bundestag's powerful finance committee meets most days to discuss financial matters in private.

The all-party committee spent three hours arguing over the details of the European Financial Stability Facility (EFSF) fund on Monday and is due to spend another three hours discussing the same theme again today.

This, rather than the chamber of the German parliament, is where the real decisions, which have the potential to affect everybody living inside the eurozone, are taken.

Perhaps the most unorthodox aspect to the room in the gleaming new parliament building is the one-metre-high cast-iron statue by the sculptor Burkard Mohr, which shows a man-like figure on his knees defecating coins into a pot.

A smaller figure sits on his back, urging him to produce more and more coins.

"It's called the Gold Shitter and it is a warning to all of us," laughs Klaus Hagemann, a committee member from the Social Democratic Party, which hopes to form the next government.

Mr Hagemann does not elaborate but it is easy to believe that most Germans believe they are on their knees reluctantly producing money while the rest of Europe sits on their back and urges them on.

That statue will probably become more familiar in the months and years ahead. German politics has never had the glamour of the United States or even the United Kingdom but there is a renewed interest in the budgetary systems in Berlin as Germany demands others follow suit.

While the details have yet to be worked out, it is increasingly clear that Germany is very reluctantly preparing to accept some form of hybrid eurobond with a euphemistic name such as stability bond if countries agree to a complete overhaul of their budgetary systems.

This will present immense challenges for most countries but especially Ireland, which has a weak parliamentary system that allows TDs virtually no involvement in the preparations that precede a Budget.

The adoption of a variant of the German system, which appears to be Berlin's quid pro quo for more aid, would force the Dail and all government departments to spend far more time on budgetary matters.

While this may sound like good news, it would undoubtedly create a large burden for our bureaucracy. Many civil servants in Germany spend several months a year filling in forms and sending them to the parliament for scrutiny before the household budget is agreed.

Both houses of parliament then negotiate with one another on a final budget that splits spending between local and national issues.

It is a tortuous process far removed from the system here where the Cabinet meets a few times in the days leading up to Budget Day and the Finance Minister then steps up and issues a series of uncosted announcements that often takes the population by surprise and are almost always voted through by the Dail.

Committees such as the German parliament's finance committee meet several times a week all year round to discuss budgetary matters and actually decide policy.

This is totally different to our system where the much weaker committees hear evidence, draw up reports but rarely have any real impact on policymaking because the Dail remains the chamber where financial matters are discussed.

This means the German committees lean heavily on the expertise of members from all parties who are often appointed without direct elections, do not have to worry about constituency clinics and are often trained economists as well.

While the Government in Dublin appears to hope that Germany will issue eurobonds without imposing institutional change and new budgetary oversight on Ireland, the Government in Berlin appears to hope that it can insist on institutional change without eurobonds.

Indeed, Chancellor Angela Merkel told MPs on Tuesday that this should happen. Most Germans agree but fear that she is wrong.

Germans disagree on almost everything but almost nobody believes eurobonds are the solution to Europe's problems. This opposition is expressed in many ways but seldom varies.

Politicians, business leaders, students at hot dog stands; they are all convinced that throwing money at Europe's financial crisis just won't work.

"Borrowing money to build houses you don't need or want is what got you into the mess. Why are you so eager to borrow more?" asks Jurgen, a 28-year-old student munching sausages and curry sauce. But Jurgen also has more sophisticated arguments that are also heard among industrialists.

Countries such as Ireland and Greece had access to cheap money during the boom because the rating agencies misjudged risk and gave triple A ratings to almost everybody.

This in turn damaged Ireland. Why, he asks, would Ireland want to create eurobonds that will repeat the same mistake again and give Irish banks cheap credit when this was precisely the problem that drove Ireland over the cliff?

Germans almost everywhere struggle with the notion that borrowing more money can be the solution to a debt crisis.

"Eurobonds are not the lesson from the crisis; we don't need to find new reasons to borrow," says Alexander Schumann, the chief economist at the DIHK, which represents 3.5 million German companies in talks with the German government and has 120 offices in 80 countries to fight German industry's corner.

"What we need is some financial regulation and an international restructuring of the banking sector."

Like many Germans, Dr Schumann believes some sort of eurobond may happen but he remains convinced that the eurobonds will fail just as previous efforts to solve the crisis have failed.

The only difference in his eyes would be that the eurobonds would bring down Germany and the other solvent countries as well. "I see it as a possibility. As an economist, I don't think it would be a good idea," he says.

Proposals to allow the European Central Bank to begin buying bonds on the primary markets is "not a therapy. It's just a way to shift the pain," he adds.

"We are deeply convinced, maybe due to our history, maybe due to other factors we don't know, that only cutting back deficits and a policy of saving can be a solution to the crisis," says Dr Schumann.

The economist is not alone in his belief that austerity is the only real solution.

Over in the German capital's Ministry for Foreign Affairs, the man responsible for relations with other European countries is equally convinced that austerity is the solution to most of Germany's problems.

The only other solution Werner Hoyer prescribes with any conviction is better budgetary oversight and further integration.

"Germany and the EU would be better off if we made a major step towards integration," he says, while adding that this cannot happen because most countries don't want it and treaty change takes too long.

Mr Hoyer, one of the architects of the Maastricht criteria, which paved the way for the euro in the 1990s, says Germans have become interested in Europe after decade of indifference. "In Germany, for the first time in many, many years we have a debate about Europe," he says. Mr Hoyer is an engaging man who describes himself "as an economist by training and by heart" and who worked closely with the last German chancellor to really love Europe, Helmut Kohl.

But despite this pedigree, his vision for Europe appears limited at times.

He speaks of the need for integration but his main preoccupations appear to be the so-called debt break and new oversight for nations that breach the Maastricht criteria on borrowing.

The debt break, a Swiss idea borrowed enthusiastically by Germany, will ban the German government from almost any borrowing after 2016.

French President Nicolas Sarkozy tried to implement something similar but it was defeated by parliament. Mr Hoyer is still a believer that other countries should follow suit.

"Two years ago, I was flying around lobbying for it. Most countries thought I was crazy," he remembers. Today it is the official policy of several countries although few people expect it to be widely adopted even if it is part of Europe's 2020 Strategy.

Mr Hoyer admits cheerfully that Germany and France were the first countries to break the terms of euro membership back in the early part of the last decade when borrowing strayed above 60pc of gross domestic product and then used their clout around the conference table to avoid the consequences. "That decision discredited the whole system. That is why we believe we need an automatic mechanism," he says.

Germany's entrenched opposition to eurobonds and belief in strong budgetary controls have become some of the dominant themes of the financial crisis.

As the crisis moves closer to a point where many observers believe the euro itself is in danger, the time is coming for all eurozone countries to decide what they want.

While the crisis has already produced many strange outcomes, making prediction difficult. There is a very real danger that Germany will agree to allow the ECB to issue eurobonds despite the sincerely and widely held belief that the bonds will destroy both Germany and the rest of the eurozone, while Ireland will sign up to a system of budgetary control so onerous that the entire political system will need to be overhauled if it is to work.

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