The Truth About Europe's Economic Problems

As Europe's leaders debate what to about the continent's sovereign debt crisis today in Brussels, many argue that EU's problems are structural -- a lack of political institutions to match economic ones, the inadequacy of current regulatory bodies, the impossibility of creating a single coherent fiscal policy for such a diverse region, and so forth. Rarely do they ask whether the fault lies not in their stars but in themselves. In that context, we find it useful to highlight this scathing speech delivered last week by former West German Chancellor Helmut Schmidt at a farewell party for European Central Bank President Jean-Claude Trichet. Schmidt argues that "a much greater threat to the future of Europe than the excessive debt levels of individual Euro area countries" is the "dramatic failure" of current European leadership, a "glaring weakness" of imagination and courage that shames the memory of the union's visionary founders.

-- The Editors

 

Dear Jean-Claude Trichet, We have known and valued one another for decades. Your good sense, your judgement and your dependability have impressed me over all these years just as much as your perceptiveness and your determination.

Ladies and gentlemen,
This man has done an excellent job as President of the European Central Bank. He has been guided solely by his responsibility for our common currency and for Europe, and for this reason his wise advice and level-headed warnings have been indispensable for governments, the G7 and the Eurogroup. In autumn 2008 he was one of the first to recognise the need for a convincing signal of confidence. The agreement of the G7 countries at the time that each of them had to prevent the failure of systemically important banks was in large part Trichet's achievement, and for this he deserves high praise. This agreement was the only thing that prevented the occurrence of a global depression in 2009.

The G7 governments -- as well as China and others -- consciously accepted the inevitable consequence of additional and exceptionally high levels of government debt. And the leading central banks, in Washington, Frankfurt, Beijing and London, to an equally exceptional extent and with exceptional measures ensured that there was sufficient liquidity in the financial markets.

But anyone who now criticises the European Central Bank and President Trichet for this must acknowledge that the domestic purchasing power of the euro has been more stable than that of the US dollar over the past 12 years, i.e. that our inflation rates have remained lower than those in the dollar currency area. And that the exchange rate of the euro has been more stable than that of the dollar. And German critics in particular should acknowledge that euro area inflation rates over the past 12 years have been lower than those in the Deutsche Mark currency area in the last 12 years before the euro was introduced.

These facts clearly shed a favourable light on the presidency of the ECB and on Jean-Claude Trichet. Since the crisis began in 2007, the ECB has followed neither German nor French nor Anglo-American ideologies and advice, but has acted pragmatically in line with its own reason and understanding, thereby also preserving its independence.

This makes all the more dramatic the failure up until now of the European Union's political bodies to contain the dangerous turbulence and uncertainty. The Executive Board of the ECB, led by Trichet, is the only body that has proved itself to be capable of action and effective during the financial and sovereign debt crisis. All the talk of a so-called "euro crisis" is thus just the idle chatter of politicians and journalists.

What we have, in fact, is a crisis of the ability of the European Union's political bodies to act. This glaring weakness of action is a much greater threat to the future of Europe than the excessive debt levels of individual euro area countries.

Some of the causes of this were put in place 20 years ago in Maastricht, when the enlargement of the European Community from 12 to 27 or more Member States was planned. A currency union was created, and all existing and future EU Member States were invited to participate in this currency union if they fulfilled the convergence criteria. But there was a failure to set down the economic and legal rules of the game for the currency union. A powerful authority with responsibility for fiscal and economic policy was not set up subsequently either. And there was also a failure to assign the necessary legal status to the Stability and Growth Pact, which Germany and France violated long before Greece did.

It will not be possible in the foreseeable future to change these structural shortcomings in the Treaties. But under no circumstances can they be used as an excuse not to fulfil our obligations of mutual solidarity and subsidiarity, to which we are bound both morally and through Articles 3 and 5 of the Treaty on European Union.

At my age, one naturally takes an increasingly longer perspective. I think back with gratitude to the solidarity of the Marshall Plan of the United States, to the Schumann Plan of the French, and to Jean Monnet, as well as to the London Debt Conference, all of which date back to the 1950s. (Incidentally, Germany paid its last instalment only last year -- that was how long we Germans were given when our debt was restructured back then!) I also think of course with gratitude of Charles de Gaulle.

In 1970 Pierre Werner suggested creating a single currency and economic area. He could be called an ideational great-grandfather of the euro. With the European Monetary System and the ECU, my friend Valéry Giscard and I then became its grandfathers. But the actual fathers of the euro were François Mitterand, Helmut Kohl and Jacques Delors.

And capable men such as Tommaso Padoa-Schioppa, Wim Duisenberg and Jean-Claude Juncker smoothed and followed its subsequent course with their unwavering commitment. I am certain that Mario Draghi will succeed in continuing along this path, and I wish him every success from the bottom of my heart.

The longer perspective is also applied to the future, of course. The cooperation between the ECB, the Federal Reserve and the Chinese central bank will fairly soon become more significant than it is today. In perhaps less than two decades, we will have three global currencies: the US dollar, the euro and the Chinese renminbi.

Hopefully by then political leaders will have finally got serious about the tighter regulation that was merely announced by the G20 three years ago with regard to globally active financial institutions and their incredibly opaque and thus dangerous instruments, which have very little to do with real value added across the world.

If need be, the euro area countries must act by themselves, and they must do so together. Allowing the current state of affairs to continue, with psychosis-prone traders in the global financial markets making politicians hostages of the financial class, is a violation of the fundamental articles of the European Treaties.

And it is worth looking even further ahead. While for 200 years we Europeans made up over 20% of the world's population, we now account for no more than 9 percent, and in 40 years we will account for just 7 percent. Each individual EU Member State will then represent only a fraction of 1 percent. And in the same year, 2050, all of Europe together will account for just one-tenth of global value added.

We Europeans are shrinking and ageing -- in some cases dramatically. But the population in other parts of the world is exploding. If in view of this foreseeable development there are those today who still believe that their current national advantage and their national prestige are more important than continued European integration, they are acting against the fundamental strategic interest of their own country not to become marginalised in the global arena.

The success of the European Union is thus in the national interest of all of us, whether we are French or Polish, Slovakian or Greek. And we will certainly retain all of our national characteristics, our own languages and our nation states. Nevertheless, we must work together much better than we do at present. And those who are temporarily stronger must of course help those who are weaker.

Since the Schumann Plan in 1950, the population of Europe has made progress that was inconceivable at the time. Virtually all of Europe enjoys human rights and peace. Who would ever have thought that this would be possible?

We were helped in this by the United States. We were helped by far-sighted Europeans. I mentioned some of them earlier, and I would also like to mention Winston Churchill, as well as Lech Walesa and Vaclav Havel. Mistakes were made, of course, and there have also been setbacks. Today we find ourselves once again in a very difficult phase. Jean-Claude Trichet has played his part in overcoming these difficulties with sound judgment and vigour; he is one of the courageous people needed by the European Union time and again.

Dear Jean-Claude, I speak as someone who is grateful to you. I know from experience that old age does not begin anywhere close to 69 or 70. You still have a great deal of work ahead of you! I wish you all the very best.

-- Helmut Schmidt, Remarks at the Farewell event for European Central Bank President Jean-Claude Trichet, October 19, 2011

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