Finnish Finance Minister Jutta Urpilainen set the scene for the long European summer break when she declared that Finland was a dedicated member of the Eurozone, eager to solve the crisis, but “not at any price”; it wouldn’t agree to take on “collective responsibility for debts and risks of other countries” via a banking union. And if push came to shove: “We are prepared for all scenarios, including abandoning the Euro.”
A spokesperson had to do some furious backpedalling: Finland wasn’t planning to abandon the euro; such assertions were “simply wrong,” her words had been misinterpreted. Nevertheless, this was the first time ever that a government official of a triple-A rated Eurozone country publically admitted that they were making contingency plans for ditching the euro—and worse, that there was a desire to do so under certain conditions.
The road to hell, I mean the road to the euro, was paved with good intentions—and signposted with lots of warnings that at the time were ignored, downplayed, or ridiculed. But one by one, they turned out to be correct. The warnings continue, along with efforts to sweep them under the rug which is more difficult now as the dimensions of the debacle have become apparent for all to see.
And so, in an open letter, 172 economists of “German-speaking countries,” including Ifo President Hans-Werner Sinn, warned citizens and politicians about the decisions of last week’s EU summit—though there’s still no agreement as to what has actually been decided. They were worried about a Eurozone banking union that would collectivize bank debts, which are “almost three times as large as sovereign debts,” and in the five bailed-out countries alone amounted “to several trillion euros.” Taxpayers, retirees, and savers of “still solid countries” must not be held responsible for them. “There is only one group that should and can carry that burden: the creditors themselves.” In other words: banks must be allowed to fail; bank creditors must take the losses; let the market economy do its job.
Politicians hope that they could limit exposure and abuse by instituting a common banking regulator, “but they will not succeed as long as debtor countries possess a structural majority in the Eurozone.” Once solid countries agree to collectivize bank debts, they will again and again be pressured to enlarge the sums they’re liable for. “Fights and disagreements with neighboring countries” would be preprogrammed. “Neither the euro nor the idea of Europe as such would be saved.” Instead it would benefit “Wall Street, the City of London—even some investors in Germany—and a series of ramshackle domestic and foreign banks” that would continue doing business “at the expense of citizens in other countries who have little to do with this.” And all “under the mantel of solidarity.”
Instant brouhaha. Just as the German parliament was wrapping up its work, and as everyone was looking forward to heading out for their long vacations with illusions of calm appearing at the horizon. That top economists would directly, publically, and en masse attack the government is unusual in Germany.
Chancellor Angela Merkel was furious. She had to explain once again what the agreement’s “small print,” that apparently no one has read yet, really contained. The EU Summit “changed nothing” in Germany, she said. “Everyone should take a good look at the decisions.” The banking union agreement deals with better supervision, and “not at all with additional liabilities.” And collectivizing bank debt continues to be “verboten,” she said.
Finance Minister Wolfgang Schäuble was “outraged.” Other economists shot back at Sinn’s group. “The letter damages the public respect for economics,” said Peter Bofinger, one of the Economic Wise Men. If banks were allowed to fail, he said, contagion effects would hit “banks in France and Germany, and therefore German savers and German taxpayers.” Some economists called the letter “irresponsible” and designed to stir up “emotions” and “fears.”
But the letter accomplished one thing: it tangled up political lines. The idea of letting banks fail rather than grouping them together in a banking union—whether or not that was one of the decisions of the EU summit—resonated not only with Social Democrats, the Left, and Communists, but also with the conservative CSU, while the sharpest opposition to the letter came mostly from Merkel’s own CDU.
Germans, who were watching the spectacle while loading up their cars with cans of food for their six weeks in Spain, bumped Merkel’s approval rating after the EU summit by 8 points to 66%; and 58% believed that she “acted correctly and decisively” in dealing with the debt crisis, which so far has been something that happened somewhere else, despite its ever growing price tag.