Merkel, Draghi and Tsipras

Simon Bulmer - Associate Fellow, SPERI, & Professor of European Politics, University of Sheffield

Domestically, Germany is following a pattern that has two sources.  The first is the ordoliberal school of thought, with its prescription of a set of rules to effect market and policy ‘order’.  Unlike neoliberalism, which reifies market efficiency, ordoliberalism presupposes the need for an ‘economic constitution’ precisely to correct inefficiency.  Nevertheless, the precise content of ordoliberal prescriptions is contested, as Wade Jacoby has demonstrated.  This contestation constrains Berlin’s policy-makers because other ‘true believers’ – whether the President of the Bundesbank, Jens Weidmann, or serial litigants challenging the legality of Eurozone policy actions before Germany’s Federal Constitutional Court – are part of a heated policy debate amongst German policy elites.  The second source is a growing politicisation of German European policy that has seen public opinion and party politics increasingly sensitised to this contestation.  Although a grand coalition of the parties has continued to support Eurozone policy measures in Parliament, the consensus is fraying at the edges, as seen notably with the emergence of the anti-Euro party, ‘Alternative for Germany’.

So how is Berlin’s policy at odds with the measures announced by Draghi and on collision course with the incoming Greek Prime Minister, Alexis Tsipras, who has told jubilant supporters that he wants to write off half of Greek debt?

Let’s start with the ECB.  Criticism of QE has been particularly strong in Germany.  Berlin’s main complaint is that QE will reduce the incentives for the debtor states, and indeed Italy and France, to undertake necessary structural reforms.  Merkel and her Finance Minister, Wolfgang Schaüble, have been discreet in their comments, indicating that monetary policy is the responsibility of the ECB.  Once again the authoritative critical German voice has been Weidmann.  He reportedly persuaded colleagues on the ECB Governing Council that 80% of QE bond purchases should be via national central banks, rather than collectively via the ECB.  This reduces the risk-sharing and moral hazard aspects of QE of particular concern to Germany. At the same time Weidmann has reiterated that he is unconvinced by QE, indicating that he had voted against it.  In the final analysis, though, ECB independence means that Berlin’s options are limited now that QE has been initiated. 

The election outcome in Greece has taken German discomfort a step further.  SYRIZA has made clear its goal of re-negotiating the terms of its rescue and the German government that these terms should be maintained.  SYRIZA’s nationalist coalition partners have also been critical of the rescue, emotively accusing Merkel, Schaüble and outgoing Greek Prime Minister Antonis Samaras of ‘terrorism’ during the election campaign.  The leading German tabloid produced the headline about Panos Kammenos, leader of the right-wing Independent Greeks: ‘Merkel-hater in Greek coalition’. Bild went further with a feature entitled ‘Will the victory of the Euro-nightmare cost us billions?’.  Controversially, Kammenos has also been an advocate of Germany paying Greece billions of Euros in Second World War reparations. 

The specific challenges presented by the new government are twofold, both reflecting the concept of moral hazard.  Can some moderation of austerity policy accommodate its position without undermining Berlin’s effective first principle of crisis management: that debtor states make a clear change of policy direction?  And what example would any accommodation with Greece set for other states?  Here the rise in Spain of the new left-wing Podemos party, an ally of SYRIZA, comes into play.  Spain must hold elections by December 2015 and recent polling has shown Podemos to be the leading party.

In sum, there is a real risk emerging that the lurid headlines that both QE and the Greek election result have attracted in the German press bring the conflict between Eurozone debtors and creditors to the fore in such a way that public confidence in the currency is undermined in Germany.  In this sense the tone of the German government’s response is as important as the substance and it is going to have to think very carefully about both.  In autumn 2014 it was concerned about levels of debt in France and Italy.  That now feels like ‘small beer’. With the Tsipras government insisting it wants to remain in the Euro, GREXIT – one possibility that has doubtless featured in Berlin’s scenario planning – is not a clear early solution.  The way forward may turn out to be more ‘muddling through’.

What is manifest is that there is no love lost between Merkel, Draghi and Tsipras, although Merkel is known as an excellent mediator.  An accommodation of their views is needed to ensure the future stability of the Eurozone.