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How Anglo-German Clash Nearly Stalled EU Rescue

M.n. Hebbar (View from Europe)
Filed on December 22, 2008

What was all that about? When British Prime Minister Gordon Brown had French President Nicholas Sarkozy and European Commission President Jose Manuel Barroso over at 10 Downing Street to agree over a “concerted fiscal stimulus”, a week ago,

the absence of German chancellor Angela Merkel at the table seemed a discourtesy on the part of Mr Brown, given the importance of Europe’s biggest economy. At worst, it was a piece of clumsy diplomacy by Sarkozy, whose relations with Ms Merkel have been rather difficult of late. To most Germans, it smacked of a conspiracy.

So it was hardly surprising when, only days later, Britain was at the receiving end of an unusually harsh attack on Brown’s policies by none other than German Finance Minister Peer Steinbruck. The minister, no doubt, with the full knowledge of the chancellor, lambasted Brown’s response to the economic crisis as “a breathtaking switch from decades of supply-side economics to a crass Keynesianism”. The stage was thus set for a bruising argument with the German chancellor at the EU summit over the weekend. The principal objection by the Germans was that governments were not thinking through on the effects of large-scale spending programmes and that it would take Britain a generation to pay for the huge financial stimulus introduced by the government to kick-start the economy. In particular, Brown’s gamble of cutting VAT (value added tax) to stimulate spending was ridiculed.

The German criticism was galling enough for the British ambassador in Berlin to telephone the German finance ministry to “express his disagreement” with Steinbruck’s attack on British policies. The formal protest evoked the memories of 1992 when Britain criticised comments from the then Bundesbank president for precipitating sterling’s ejection from the Exchange Rate Mechanism. Brown, however, brushed it off as the fallout of German politics by declaring that the 27 EU nations were united in agreeing that a suitable fiscal stimulus was needed to tackle the recession.

Wiser counsel prevailed at Brussels, however. The summit saw President Sarkozy chairing his last summit in the EU’s rotating chair and struggling to get a reluctant Germany to spend more on re-launching the EU economy. Several European nations were sliding into a recession, including the 15 nations in the euro-zone. Ms Merkel finally signed in on the deal, supporting a EU-wide 200 billion euro stimulus package, consisting largely of national contributions but with some help from the common EU budget as well. The devil, as always, would be in the details.

That said, Brussels saw Sarkozy basking in praise for his ‘skilful’ handling’ of France’s storm-racked six months in the EU presidency and the buzz that he plans to reign as Europe’s “saviour”, after the Czech Republic takes over on January 1. Elysee sources are already talking up their boss as President of Europe well beyond 2009!

Sarkozy seems convinced that he has galvanised Europe and led the EU into a new image of a “power centre” that can act with efficiency as in the case of the management of the credit crisis and emergencies such as the Georgia crisis when Sarkozy negotiated a ceasefire with Moscow. He now sees his close partnership with Gordon Brown as part of the new power equation. So much for the Franco-German axis.

With Germany focused on elections next year and Britain going through a more painful recession than countries of the euro-zone, France perceives an advantage in bettering its economic stakes, even if Sarkozy’s wishful thinking that Britain will soon abandon its sterling and embrace the euro to save itself from the collapse of the pound remains extremely fanciful.

The flurry of speculation that Gordon Brown would be tempted to swap sterling for the single currency owes more to the babble of Eurosceptics than to the mandarins of Whitehall. The facts do not add up. The present economic crisis has proved that Britain, despite its record of prudent financial management, is not going to be out of the woods any time soon. The pound’s headlong slide, losing 20 per cent since last year, has only served to revive memories of sterling crises past.

Secondly, both economics and politics dictate that swapping a currency in the midst of a recession would be sheer folly. Brown has always talked of economic convergence as a factor in the decision to embrace the euro. This is hardly the case now.

The political scenario in Britain, with the Conservatives breathing down Brown’s neck, says it would be suicidal for Labour to even contemplate a switch. With paranoia about the euro widespread across Britain, the British government remains firmly against the euro and has argued that things would have been much worse had Britain tucked itself in the euro-zone.

Merkel is in agreement with Gordon Brown over the implications of VAT as the right step to support the UK economy. But the adroit chancellor was quick to reject such a course for Germany, where consumption has held up relatively well in recent months. She has made it clear though that Germany is less enthusiastic than France and the UK about large-scale deficit spending plans, suggesting that such steps may harm EU’s fiscal stability in the medium term without doing much to revitalise the economy.

Encouraged by the consensus, European Commission President Barroso has proposed a joint US-European response to the crisis. But the fact that Barroso has an eye on EU politics makes it a non-starter. He stands for re-election as Commission president next year. There is no silver bullet for the downturn.

M N Hebbar is a Berlin based writer





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