07 March 2012

Wolfgang Schäuble: Economic and institutional perspectives

Mr Schäuble warned that in order to increase Europe's capacity, we must work again and again to strengthen the European institutions so that the decisions taken at the European level are taken within European institutions.

Following the global financial and economic crisis triggered by the Lehman collapse there was a change which I describe as a structural shift in financial markets’ tolerance of (government) debt. This explains why, in 2010, when the Greek issue first came to the fore, we were confronted with extreme risks of contagion for the other euro area countries, while Europe’s ability to respond appropriately was seriously impaired. Against this backdrop, I floated the idea of a European monetary fund at the start of 2010, but back then there was no majority support for such a far-reaching stabilisation tool. 

Providing support to crisis-hit euro countries is always about straddling a fine line between encouraging reform and providing incentives that delay reform measures. I am not one of those people who believes that the problems in today’s global economy and in Europe can be solved by having more liquidity and higher government debt.

I have had many tough and sometimes strenuous discussions in Europe over the past year with different partners and our American friends in particular. And during those talks I have made it plain that the economic policy approach of constantly securing sustainable growth, if needs be, through ever greater amounts of cheap money and more liquidity have been pushed ad absurdum. It is telling that American economists have demonstrated in lengthy studies that there is a threshold in the level of government debt – or in the perception of market participants and the business and financial market community – beyond which a further increase in government debt ceases to promote growth, and actually has the opposite effect. A view the German Government categorically shares!

I therefore believe that we will only solve the European crisis if we approach things in the right order. First of all, those countries responsible for the causes of the crisis have to tackle them credibly. This does not just involve decisions on the budget. It also covers economic and growth-related deficits that have to be rectified through deep structural reforms. That’s why the assistance packages introduced for countries in crisis must not reduce the pressure on countries to tackle their problems in a credible fashion. Otherwise we would be providing the wrong incentives. What we need are stable political structures for the currency union. And until that takes hold, we are buying time by providing assistance in a spirit of solidarity.

The present solution is not a perfect fiscal union, but it can take us forward in that vein, and I am convinced that we will then be able gradually to restore confidence and stabilise the common European currency. That must be our aim – not least because a permanently stable European currency is a central pillar for us to be able to defend and promote European interests in a globalised world.

Full speech

© Bundesfinanzministerium