11 June 2012

Gideon Rachman: We isolate and overload Germany at our peril

In his FT column, Rachman says that "despite the burdens and risks that Germany has already taken on, the country's government finds itself abused for not doing even more". He cautions that isolating and berating Berlin, while trying to force the country to underwrite the finances of the whole of the eurozone, is a politically dangerous course.

The demands being made of the German government spring from a sincere desire to avoid a rerun of the 1930s, when economic disaster provoked political catastrophe. However, while these demands may make economic sense, they are politically unrealistic and dangerous. They are textbook solutions that fail the real-world test. Worse, if enacted, they would risk provoking the very political radicalisation they are ultimately meant to prevent.

Consider just one of the proposals on the shopping list: a Europe-wide bank deposit insurance scheme. As a senior Dutch politician who shares the German view puts it: “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67”. From the Dutch and German point of view, it is unfair for their citizens to underwrite the banks of countries using their own money to pay social benefits that are more generous than those on offer in Germany or the Netherlands.

This dilemma illustrates why a relatively technical-sounding exercise such as bank deposit insurance has profound implications for national sovereignty. Once you take a big step towards the mutualisation of debt across Europe, you are forced towards much deeper political union. It is not just the much-discussed need for a European “minister of finance”, with the power to override national governments. To avoid bitter disputes over fairness, you would also need to harmonise European social security systems. That would be the work of decades.

The Merkel government is not ruling out eurozone bonds or EU deposit insurance for ever. It is arguing that any such moves can come only as part of a bigger project – the formation of a political union. Anything else will feel like giving southern Europe a German credit card, without setting a credit limit.

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