Monday, July 16, 2012

Germany's Leading Role in Weakening the Euro

July 16, 2012

In the early 2000s, Germany was struggling to adhere to euro-zone criteria aimed at ensuring common currency stability. Instead of introducing austerity, however, Chancellor Gerhard Schröder simply launched an effort to change the rules. New documents show just how key his role was in weakening the Stability Pact.

In moments of triumph, modesty is the largest casualty. It was March 21, 2005, a day that German Chancellor Gerhard Schröder, a member of the center-left Social Democrats (SPD), felt was "a good day for Germany, a good day for Europe and a good day for economic development."

After a more than two-year struggle with an intransigent European Commission, reluctant partner countries and a rebellious finance minister, Schröder finally got what he wanted: the Stability and Growth Pact, intended as the guarantor of a stable euro, had been weakened. Finance Minister Hans Eichel (SPD), ultimately deciding not to take a back seat to Schröder in his moment of hyperbole, interjected that the pact had become "more credible and reasonable."

Seven years later, that which triggered the celebratory mood at the time is now seen as a lapse that made possible the current crisis faced by the European common currency. It permanently undermined confidence in a set of regulations that was intended to force countries to pursue responsible fiscal policy. Afterwards, several countries felt sufficiently emboldened to abandon their efforts to limit spending.

The pact originally obliged member states to maintain budget deficits at or below 3 percent of gross domestic product and a total sovereign load worth no more than 60 percent of GDP. Violators received a preliminary warning from the European Commission. If new borrowing remained excessive, financial penalties could result.

It is widely accepted that this corset was loosened at the insistence of Germany and France. In truth, however, the weakening of the Stability and Growth Pact was primarily the work of one man: Gerhard Schröder. He received support from his chief of staff, Frank-Walter Steinmeier, and from Reinhard Silberberg, head of the European division in the Foreign Ministry. Documents from the Chancellery, released in response to a SPIEGEL request, show that Schröder and his government were the driving force behind the effort. They also show that attempts by Eichel and his ministry to resist were ultimately in vain as he was forced to give in to pressure from Schröder. What's more, Schröder picked Eichel to convince the remaining holdouts among Germany's euro-zone allies.


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