George Kerevan: Leaving coffers in Berlin

I’M IN Berlin, sitting in the grand conference room of the German ministry of finance. I’m waiting to see Wolfgang Schäuble, Germany’s George Osborne. Schäuble and Osborne share a commitment to enforcing austerity. Beyond that comparisons pale.

Schäuble, 69, is crusty, highly popular and a veteran of several administrations led by the right-wing Christian Democratic Union (CDU). The man who negotiated the takeover of the old Communist GDR, he is a committed European federalist who wants to see an elected president of Europe. He is confined to a wheelchair after an assassination attempt in 1990.

Forget Brussels: Schäuble and Germany are now in charge of Europe’s economic policy.

In the UK, a consensus has grown regarding Germany’s economic stance. Crudely, this says that Berlin is using the sovereign debt crisis for its own narrow economic ends, and risks plunging Europe into near permanent recession.

Germany has done well out of the euro. The international value of the currency remains cheap, which means Germany’s foreign exports are booming.

If the euro did not exist, the old Deutsche Mark would long since have skyrocketed in value, pricing German luxury cars and machine tools out of the market.

This, the argument goes, explains Berlin’s determination to keep the euro. However, the common currency is threatened by soaring public debt in Greece, Spain, Portugal, Italy and Ireland. Default by these countries would wreck confidence in the currency and destroy Europe’s banking system (as the banks are the ones holding the sovereign debt). Therefore, say the conspiracy theorists, Schäuble is holding a fiscal gun to the heads of the delinquent eurozone members.

Germany will fund short-term budget bailouts – otherwise known as the European stability facility (ESF) and the still-to-come European stability mechanism (ESM). In return, the delinquents must introduce draconian austerity measures and labour market reforms to put their economies in order. So must the rest of Europe, policed by the new, legally binding financial stability pact that David Cameron refused to sign up to.

For the conspiracy theorists, Schäuble’s monomania about austerity is near suicidal. Already the eurozone has slipped into collective recession. Even the German economy contracted in the fourth quarter of 2011.

With youth unemployment hitting 40 per cent in Greece and 50 per cent in Spain, there is every prospect of a social explosion. Yet apparently Berlin seems content to do only as much as is necessary to stave off each individual budget crisis while rejecting any systemic solution, such as permitting the European Central Bank (ECB) to act as a lender of last resort to eurozone governments.

Critics point to another “suspicious” development. This austerity drive is being directed by Berlin itself, not the pro-growth European Commission in Brussels (traditionally dominated by France), which has been sidelined. Everything in this crisis is being negotiated bilaterally, government to government – with Berlin taking the initiative.

However, Germans remind Europe that they have also taken an austerity bath. Everywhere I went there were constant tart references to a front cover on the Economist magazine in 1999 that called Germany “the sick man of Europe”.

At that time, after the launch of the euro, Germany suffered low growth, rising unemployment and declining competitiveness. Stuck in a common monetary system, the only solution was internal reform.

A new consensus emerged called Agenda 2010. Germany decided to dismantle its post-war economic model, based on generous welfare and lifetime jobs.

Instead, Gerhard Schröder, the then Social Democratic Party chancellor, dismantled national wage bargaining, slashed entitlements and oversaw a significant reduction in wage costs. It comes as a surprise but Germany has no minimum wage – one reason, according to the all-powerful Association of German Chambers of Commerce, that youth unemployment is only 6 per cent compared with 20 per cent in the UK.

What Germans could do, Schäuble believes the rest of Europe should be able to do – especially if they expect help from the German taxpayer.

However, Germany reformed during a global boom. Expecting Greece or Spain to do the same in a European recession is a very different matter.

The Germans are afraid that any public statement which deviates from telling the debtor states to mend their ways will only encourage them to go on sinning.

That does not mean Germany is unwilling to go further in supplying financial aid. I received lots of not-so-subtle hints that Berlin can be “trusted” to intervene financially if the markets turn against Spain, Portugal or Italy. This is a major development which is not appreciated yet in the UK (or in the bond markets).

During 2011, Germany debated walking away from the euro. But the implications – rising nationalism and the collapse of the post-war European project – made them take fright. Now the German elite has decided that national self-interest lies in saving the euro and it will do anything necessary to that end.

However, the quid pro quo for the rest of the eurozone is fiscal discipline and lower wage costs.

The mood in Germany today is now surprisingly upbeat. They believe that the decision of the ECB to pump a trillion euros into European banks in December and February has returned the system to temporary stability – though one CDU MP let the side down by staying this was “outside the ECB’s mandate” and “probably inflationary”. Germany also believes the stability pact, which binds EU members to legal limits on public borrowing, will provide long-term fiscal discipline, calming the markets – assuming it gets its two thirds majority in the Bundestag.

What can go wrong? Plenty. For a start, the economic crisis is going to get worse before it gets better.

Spain is slashing the equivalent of 2.5 per cent of GDP from its budget and Italy is cutting by 3.5 per cent. Yet Germany is making no effort to expand domestic consumption and imports to give southern Europe somewhere to export to. If anything, the ECB’s injection of liquidity into the European banking system has prompted the uber-conservative Bundesbank to screw down German credit to head off inflation. Forget any notion that German intends to offer southern Europe a market, or reduce its own trade surpluses.

All of which means that debtor countries could rack up even bigger deficits as they struggle with recession, reigniting the bond crisis. There are already signs that Spain’s cost of borrowing is rising.

At the same time, the ECB’s liquidity injection is being used by Spanish and Italian banks to load up on junk eurobonds rather than reforming their balance sheets.

This will test Berlin’s new-found resolve to “do anything it takes” to save the euro.

Most people I spoke to expected the outcome of the euro crisis would be “more Europe”. One suggestion is that any move to genuine fiscal integration would require democratic legitimacy in the shape of an elected head of the European Council (a CDU demand), or a new elected chamber to approve national budgets. But this is light years away, if ever. Which leaves us with a new bilateral Europe and a German one at that – something Brussels-obsessed Brits have failed to notice.

Schäuble is on record as saying: “We can only achieve a political union if we have a crisis.” He is playing that crisis to the full.

My visit left me feeling the Germans have a shrewder understanding of the crisis than the “Anglo-Saxons” give them credit for. On the other hand, the German elite is still woefully underestimating the risks of instant austerity.

You can buy chocolate euros in the souvenir shop at the foot of the ECB’s HQ in Frankfurt. I don’t know if that reflects the German sense of humour, which is robust, or an ironic comment on the euro crisis.

Time will tell if Schäuble’s gamble with austerity pays off.