Wednesday, April 24, 2013

German reunification and the birth of the euro

Otmar Issing, former ECB and Bundesbank chief economist recalls how he warned against the creation of a  currency union between Eastern and Western Germany at the time of unification. “I must confess that we were totally wrong on the political fundament. We could not imagine early February 1990 that in October, we would have a united country,” he told CNBC in Oct 2010 on the 20th anniversary of reunification:

Simon Kuper, The Financial Times columnist, recently speculated that Margaret Thatcher’s early opposition to German reunification, gave President François Mitterrand an opening to demand Chancellor Helmut Kohl’s agreement to the launch the euro. A year before in 1988, Jacques Delors of France, the European Commission president, had set up a committee of central bankers plus himself as chairman, to explore the issue of a common currency.

In an interview conducted for a journalist's PhD thesis, Germany's longest-serving postwar chancellor said that he would have lost any popular vote on the euro by an overwhelming majority.

"I knew that I could never win a referendum in Germany," he said. "We would have lost a referendum on the introduction of the euro. That's quite clear. I would have lost and by seven to three."

The Daily Telegraph said this month that the interview was conducted by Jens Peter Paul, a German journalist in 2002, the year when the Deutsche Mark was replaced by euro notes and coins, but has only been published now.

In it, Kohl describes adopting the euro as an emblem of the European project, which he said had prevented war on the continent. Born in 1930, Kohl's politics were shaped by his country's history in the 1930s and 1940s; his final years in power were focused on promoting European unity.

In the interview, he said: "If a chancellor is trying to push something through, he must be a man of power. And if he's smart, he knows when the time is ripe. In one case - - the euro - - I was like a dictator ... The euro is a synonym for Europe. Europe, for the first time, has no more war."

As for Mitterrand using the euro as a bargaining chip, a man who could be in both the Résistance and Marshall Pétain’s Vichy government at different times, knew how to play his cards.

However, Kohl, Mikhail Gorbachev, the leader of the Soviet Union and President George H. Bush, were the main players.

Kohl could have delayed the euro project but just 14 months after the rebirth of a united Germany in October 1990, the Maastricht Treaty was signed to give effect to a common currency.

Later, at a summit In Dublin in 1996, President Jacques Chirac wanted the new currency called the écu (not to be confused with ECU — the European currency unit) named after a gold coin minted in 1266 during the reign of Louis IX. However, to the Germans, it sounded like the word cow.

This paper details fraught Franco-German relations prior to the euro’s launch.

So, the French saw the euro containing German economic power but didn’t bargain that both consecutive annual budget deficits since 1974 and annual trade deficits since 2002 would weaken itself.

There was no alternative to reunification but the politics got much more attention than the economic impact. However, taking on this project and the euro was quite a lot. Again, the politics were more important than the economics when it came to the euro.

Kohl was thinking of the political benefit for his CDU party by allowing East Germans to exchange their currency for Deutsche Marks at parity but even firms in the East that could have survived during a period of adjustment, didn’t have a chance.

It’s not uncommon for contemporary politicians to be seen as dwarves compared with perceived giants of the past.

The styles of Angela Merkel, current German chancellor, and Helmut Kohl (1982-1998) are polar opposites. Even so, Kohl did not level with the German people when he was embarking on momentous journeys.

I think it is a bit facile to believe that it would have hugely mattered if Merkel was more candid with the German people  about seeking support for huge transfers to struggling economies.

In Wolfgang Schäuble, she has a powerful finance minster who has no reason to have personal loyalty (even after seizing the party leadership, she refused to nominate him for the German presidency in 2004). They appear to agree on the major issues.

The Eurozone could do with strong leadership in its four biggest members.

But for Dominique Strauss Kahn’s sexual escapades, François Hollande’s political career would have continued to have been a litany of disappointment. He did not get a ministerial job under François Mitterrand, in 1981-95 (there were 2 two-year periods where the right had the majority), nor when the Socialists ran the legislature in 1997-2002. As for Spain, an FT article said last January: “Spaniards often describe their prime minister as a typical Galician – reserved, reluctant to give a clear answer, ever keen to keep his options open. Popular lore has it that when you meet a Galician on a staircase, you never know whether he is going up or down.” Italy’s political crisis continues.

Otmar Issing, the first ECB chief economist, said in 2010 (video above) that in early 1990, he was a member of the council of economic advisers (the so-called ‘wise men’) and the group issued an open letter opposing a West-East German currency union (with parity between both currencies). Issing said all the economic risks they warned about came to pass.

Chancellor Kohl was furious and cut ties between the chancellery and the group.

Merkel is indecisive while Kohl acknowledged acting like a ‘dictator’ in pushing forward the euro project. He certainly seems to be a stubborn person and while it’s not unusual for family to be sacrificed for political ambition, it seems strange to me that a father would maintain an estrangement with his two sons for decades. In 2001, they lost their mother to suicide (she had a rare allergy to sunlight).

In the sweep of history, German reunification will be inextricably linked with the genesis of the euro.

“Reunification is not only one of the underlying causes of the euro crisis, it is also one of the reasons behind our inability to solve it,” Wolfgang Münchau, the FT columnist and a native of Germany, wrote last year. “This is exactly the tragedy of Helmut Kohl: with his great political coup of German unity, he sowed the seeds for the destruction of his greatest political dream of European unity.”
"The hasty reunification cost almost two trillion euros in transfer payments, and it was the greatest example of economic mismanagement in the history of the world. It was a record, which is only now about to be smashed by the euro-disaster. One can hardly be surprised that the (formerly West) Germans, who had to put up with the transfer payments to East Germany (and must still put up with them) want no further transfer union in Europe…Due to the costs of reunification, Germany entered the euro at an inflated exchange rate. The result was that for a whole decade German economic policies concentrated on boosting Germany’s own competitiveness against third parties instead of strengthening the economic performance of the Eurozone as a whole. And that was one of the major causes of the crisis that would come later. 
German and European unification can therefore largely not be reconciled, because they have both turned out badly economically. I believe that future historians will take a critical view of German unification and Kohl’s merits, which is the view today."