How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
As devoid of successors as she is of challengers, German Chancellor Angela Merkel will in all likelihood seek another term in next year’s federal elections. In spite of her party’s lackluster performance in regional polls this year, Merkel will win again. Her current coalition partners, the Social Democrats, have been unable to come up with a potential challenger, and the Greens are more likely to aim for sharing power with her than risk antagonizing her. By the end of that next term, Merkel will have been in office for 17 years, eclipsing even West German Chancellor Konrad Adenauer and her own mentor, Helmut Kohl, the architect of reunification. But to what end?
Merkel’s legendary pragmatism—much admired during the darkest hours of the eurozone crisis—betrays a lack of ultimate purpose. Rightly or wrongly, within Germany, she has been decisive about energy policy and refugees. At crucial European policy crossroads, however, she has consistently chosen pragmatic but ultimately mistaken paths, at best delaying the continent’s recovery from crisis and at worst deepening the existential threats to the Europe she purports to defend.
The flames of the global financial crisis reached Europe quickly in 2008, and soon enough, every sovereign announced credit lines for their financial institutions. Merkel spearheaded the bank rescues, passing the German bill at record speed in the Bundestag; yet she resisted a unified European response. She tactically favored independent national solutions, aware as she was of the claim that a European response would heighten moral hazard among bankers. She took that stance in spite of the fact that one of the first troubled banks, Dexia, was by definition a transnational bank that required coordination between Belgian, French, and Luxembourgian authorities. Yet national bailouts are only as credible as those countries’ respective sovereign balance sheets—some of which were incredible, indeed.
The strict nationalization of the banking problem in the midst of a global crisis tied financial systems to the mast of each individual nation. Amid the shipwreck, it was Merkel who then resisted former French President Nicolas Sarkozy’s proposal to use the incipient European Stabilization Mechanism (ESM, and its temporary predecessor, EFSF) to recapitalize continental banks. Sarkozy spoke of a German-French “responsibility to stabilize the euro,” but every new tranche of international aid became an issue at the Bundestag and in the German public sphere, even when bailouts implicitly helped German institutions that were exposed to troubled loans.
In the end, the stigma associated with ESM funding was such that Italy refused to access its credit lines and Spain did so only under duress and solely for its banks. Merkel is said to have promised former Italian Prime Minister Mario Monti that bailouts would eventually be federalized to pool risk and avoid dragging down sovereigns with them, but nothing came of it. To this day, Italian banks remain undercapitalized.
Europe’s serial deficit offender, Greece, has procrastinated on reforms for years, perennially under-delivering on its promises to the partners that have funded it since 2011. And yet, when Greece had a reformist government led by former Prime Minister Antonis Samaras, the German government showed little to no flexibility on creditors’ deficit reduction goals. The focus was put on spending cuts that paradoxically reduced the social consensus around opening up an outdated economy, weakening the case for the very type of structural reforms that helped Germany rework its economy (“Agenda 2010”) during the chancellorship of Merkel’s predecessor, Gerhard Schröder. In the end, spending cuts contributed to the Greek government’s downfall but they kept the peace within Merkel’s governing coalition with the liberal Free Democrats, who were nonetheless crushed in the following federal elections.
It was also due to Merkel’s domestic electoral schedule that Greece’s bilateral loans with sovereign creditors were not restructured alongside its private debts in 2012. The troubled country managed to reduce its debts to the private sector, yet it is still saddled with direct debts to its European partners. Everyone in Europe knows those debts will not be paid off in full any time soon, yet Merkel’s word is still final.
Thus, continental pragmatism contributed to the rise of Syriza, a party that almost accidentally delivered Grexit last year. Italy, too, nearly shared that fate after Monti’s reformist government ended its term; if not for Matteo Renzi, a reformist prime minister struggling to revive domestic growth, a populist comedian might literally be in power in Rome. Germany, for its part, is now the single best electoral target for populist anti-Europeans, from Syriza on the hard left to France’s Front National on the extreme right. Although it is unrealistic to expect Marine Le Pen to win the French presidential elections next year, it has become hard to believe that she won’t be one of the finalists in the second round of voting. After all, she is consistently polling ahead of all other contenders for the first round of voting; this will put pressure on the so-called “republican pact” between established parties to avoid allowing the FN into power at a time when trust between the French left and right is at record lows.
Perhaps Merkel’s most serious continental blunder came with the 2013 Fiscal Compact. After a series of sovereign bailouts, Germany insisted on changes to Europe’s failed Growth and Stability Pact, a set of macroeconomic rules for all countries in the eurozone. The pact had been rightly criticized as incomplete in the context of a monetary union that was far from perfectly designed. Merkel’s preferred course was to draft a new Fiscal Compact to increase budgetary discipline and heighten the credibility of Germany’s export-oriented economic boom.
Yet the chancellor adopted only a partial version of the right solution. The original proposals included a path to eurobills and eurobonds, matching strict limits on national budgets with increased federal budgetary power and anti-cyclical stimulus. This could have Europe’s version of Alexander Hamilton’s Funding Act of 1790, a crucial piece of legislation that solidified the United States’ nascent federal government by creating a deep federal debt market that remains the world’s most liquid today. Merkel chose not to fight that fight, so that limits on national spending were not matched by increased federal funding for important projects from education to infrastructure. At a time of damaging unemployment among young voters across the continent, Europe is still debating how to account for infrastructure spending in national accounting.
Something similar occurred with Europe’s banking union; Merkel’s Germany agreed to measures aimed at improving the supervision of banks in the EU while at the same time resisting the creation of a continent-wide insurance mechanism for depositors akin to the Federal Insurance Deposit Corporation (FDIC) in the United States. There is broad consensus among experts—both in Europe and abroad—that a European FDIC would help reduce the risk of a new localized banking crisis. As usually happens in financial crises, delay will only increase the price of the solution.
With stricter national deficit limits but no path to eurobonds at the federal level, it is wholly unsurprising that the European Central Bank had to resort to gargantuan quantitative easing to reduce intra-European sovereign spreads. The central bank under the stewardship of Mario Draghi stepped in to reduce the cost of debt for indebted sovereigns, so as to reduce the risk of a blowup while encouraging risk-taking to revive the economy. Yet the effects on inflation—per EU treaties, the ECB’s sole target in Europe—are insufficient at best. Only belatedly has it become clear that monetary policy alone cannot deliver a strong enough recovery to prevent populists from arguing that post-crisis policies benefit only elites.
Merkel’s pragmatism has remained intact in the face of the Brexit shock this past June. At the much-hyped Bratislava Summit earlier this month, she had promised a future vision of a Europe that would move beyond the loss of such an important member as the United Kingdom. But with regional polls revealing loss of support for her party’s continued rule, Merkel was in no mood to go along with French and Italian calls for a deeper commitment to integration beyond defense. The declaration that emerged from the summit relegated the economic issues that contributed to Brexit to the last section of an uninspired document. It made the vacuous promise to “deliver on promises.”
At the height of her power, Merkel has been compared to Bismarck, whom a young Henry Kissinger once described as a “white revolutionary” for his ability to launch a political revolution so that his conservatism could endure. But pragmatism, however effective, loses purpose if devoid of an overarching strategic goal. There ought to be a purpose to power beyond permanence. And on that, the mighty and resilient chancellor is lacking.