Germany’s Role in Resolving the Euro Crisis

On March 21, 2012, the American Institute for Contemporary German Studies (AICGS) hosted the former Ambassador of the Federal Republic of Germany to the United States, Dr. Klaus Scharioth, to articulate Germany’s role in resolving the crisis in Europe. This discussion was made possible by the AICGS Business & Economics Program and moderated by Alexander Privitera, AICGS Senior Fellow and N24 Washington Correspondent.

To begin, Dr. Scharioth clarified that what Europe has been experiencing (and emerging out of as of last fall) is a “financial crisis” rather than a “euro crisis.” In the early 1990s, the question was whether to deepen European integration with a monetary union and hope to graduate to more integration eventually, or to follow the “crown theory” of establishing a monetary, economic, fiscal, and even a tax union from the start. Ultimately, the European Monetary Union was established in 1999, and because the introduction of the euro was so successful in both the north and the south, there was little incentive to extend to further unification. However, the Stability and Growth Pacts created such strict rules that countries became accustomed to disregarding them, and the banking sector overleveraged. National governments had to step in, provide stimulus to the markets, and the debt increased even further. Initially the crisis had nothing to do with the euro per se, but was rather a result of uncontrolled debt.

Dr. Scharioth proposed a three-step path for the European Union to recover from this crisis.

  1. Provide liquidity for those in need to increase solidarity between the north and the south. There are two ways in which this step has already been accomplished: through the creation of the European Stability Mechanism and through the increased balance sheet of the European Central Bank.
  2. Get at the root causes of the crisis. Rather than simply “bailing out” the suffering countries, there need to be more structural changes. The first focus needs to be on the lack of competitiveness in southern Europe and the gap in productivity of new technology. There should be stronger support for innovation, investment in education, science, and infrastructure. Germany went through reforms in 2002 to increase competitiveness, and certain companies are also in the process of reforming themselves. Other countries need to follow this example. Second, stronger methods of governance must be in place to encourage fiscal responsibility. This issue has been primarily tackled through the creation of the fiscal compact but there is still room for improvement.
  3. Create a strategy for growth. Dr. Scharioth proposed giving more money to the European Investment Bank and further utilizing structural and cohesion funds. The least amount of progress is in this area and work is required to further redirect money where it is most needed.

In the short term, intergovernmental cooperation must increase in order to complete the path to recovery. In the long term (5-6 years), Dr. Scharioth sees the need for a more complete union with a treaty change. Overall, there is a very delicate balance between the need for solidarity by providing immediate aid and the danger of avoiding tackling root causes.

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Kimberly Frank

March 21, 2012