Is Europe’s problem German strength or German weakness?

Angela Merkel once told the French President: "Nicolas, you will have to get used to the fact that I am slow". As the rest of Europe soon learned, Merkel is not prone to exaggeration. Uncertainty, prevarication and finger-pointing have dominated Europe’s ham-fisted approach to the crisis engulfing it.

The conflagration in the eurozone has profound implications for the wider European Union since significant political capital was invested in the creation of the single currency. Much of the European integration project is now staked on its success. Merkel’s prescient remark that "if the euro fails, then Europe will fail", is, again, no overstatement.

Initially limited to Greece, the crisis could have been contained with swift action to prevent a disorderly default and contagion to other rickety European neighbours. Alas, it took several months of fraught negotiations and market jitters to approve the first rescue package in May 2010, forever undermining the markets’ confidence in the eurozone’s crisis resolution mechanisms. What crisis resolution mechanisms, one may ask. Indeed, the "no bail-out" clause was firmly enshrined in the Maastricht Treaty in 1992 and no lender of last resort was ever designated, a role that has slowly fallen to the European Central Bank (ECB). However the monetary financing of debt is anathema to German policy-makers, who argue that that the burden of adjustment should fall on the eurozone members who pursued a spendthrift fiscal policy. Germany has consistently rejected any notion that it should address its own internal imbalances, such as its excessive current account surplus and low domestic consumption, as a means of resolving the crisis. "Economically, there is a perception that exporting is not a very bad thing as long as Germany isn’t doing it", said Steffen Kampter, parliamentary secretary to Germany’s minister of finance.

He has a point. Since reunification Germany clamped down on wages so that unit labour costs fell by an annual average of 1.4% from 2000-08, a significantly higher rate than America and other European neighbours. Thanks to its sound economic policies Germany’s share of exports in its GDP gained 25 percentage points from 1993 to 2008. It is easy to see why Germans are loath to see their country’s surplus lambasted as a source of imbalance within the eurozone. "If one is more competitive than others, then others have to become more competitive", continues Kampeter.

Germany’s success, however, owes much to the bedevilled single currency. Its exports became cheaper than they would have been under its treasured D-Mark as the euro reflected Europe’s competitiveness, not just Germany’s. The European Commission has estimated that the euro was around 10-12 percent undervalued for Germany in the first quarter of 2009. Furthermore, almost half of Germany’s exports go to its eurozone neighbours. Germany may be right in arguing that the rest of Europe ought to play catch up rather than force it to shift down a gear, but the message falls on rather hostile ears when bail-outs are accompanied by draconian austerity measures that have perpetuated Greece’s gruelling recession for five years. "There is frustration with Germany, [it] is moving ahead, but what are they doing for the rest of Europe?" says André Sapir, a senior fellow at Bruegel, a think tank.

German preponderance in Europe is not a novelty. Germany has outshone the continent since the 1980s, when the mark’s strength caused strains in the European Monetary System. As such, the Economic and Monetary Union project was born out of a desire to liberate other European countries from the dominant monetary policy of the Bundesbank. The current crisis is reminiscent of that situation, both because of the ECB until recently pursuing a rather conservative monetary policy which harmed heavily indebted countries, and because Germany’s deep pockets mean it calls all the shots. In the words of Tommaso Padoa-Schioppa, "German leadership of Europe is a fact, ignoring this would be the wrong way for Berlin to exercise its leadership."

Merkel seems to have grasped this, albeit belatedly, and has embraced her de facto leadership with the quasi-scientific meticulousness that characterises her political method. As Guy Verhofstadt, a former Belgian prime minister, once remarked, "she likes incremental steps, she has no vision for Europe." Germany’s skewed economic prowess may have been one of the factors at the heart of Europe’s travails, but with foreign assets worth some 6 trillion euros, consisting mostly of claims on eurozone members, Germany would be no winner in a break-up of the euro. In fact, the stress tests on European banks in 2010 revealed just how exposed Germany’s feckless banks were to Greek debt, which largely helps explain the reversal of Merkel’s position towards a Greek bail-out. Saving the eurozone was synonymous with saving the German banking system from collapse.

Wolfgang Münchau wrote in The Financial Times that "with unification, Germany has become too large to be an ordinary European state, yet not large enough to be a superpower", thus neatly encapsulating the difficult relationship between Europe and Germany. The latter’s overbearing economic strength is part of the problem, but by failing to translate economic might into political leverage it has allowed the crisis to fester and the idea of Europe, esoteric though it may be for many voters, to fade into oblivion. Instead of rallying Europe around the vision that has guided the integration process hitherto, a harmful chasm between fiscal saints and sinners has been allowed to take root. Merkel has concentrated on demanding trenchant reforms in embattled countries and more intrusion on national sovereignty with the latest "fiscal compact", whilst dogmatically refusing to concede anything in return. Any attempts to set up Eurobonds as the sine qua non of increased budgetary surveillance have been stymied. If she is to emerge as a successful leader of the beleaguered old continent, she must bring out her "conductor’s baton". A concrete plan to restore growth and competitiveness in Europe which does not rely solely on self-perpetuating austerity would be a good start. Bring on the Merkel Plan.

Global banking system SWIFT-ly cuts off Iranian banks

Kurdistan Photo

In an attempt to step up pressure on Iran to curb its nuclear program, the world’s biggest electronic payment system, the Belgium-based SWIFT, cut off some two dozen blacklisted Iranian banks on March 17 in response to EU regulations. The move, likened to being expelled from the financial equivalent of the United Nations, will financially isolate Iran by shutting down its main channel of business with the rest of the world, impacting both on the government and Iranian businesses.

SWIFT Chief Executive Lazaro Campos made a statement on Thursday saying “disconnecting banks is an extraordinary and unprecedented step for SWIFT. It is a direct result of international and multilateral action to intensify financial sanctions against Iran". U.S. Senator Robert Menendez, who was among those pushing for the expulsion of Iranian banks from SWIFT to be included in pending U.S. sanctions legislation, said “the joint action of the U.S. and EU sends a strong message to Iran that we are serious about imposing punishing sanctions”. Similarly, the U.S. undersecretary of Treasury for terrorism and financial intelligence, David Cohen, said in a statement that SWIFT’s decision “reflects the growing international consensus that substantially increased pressure is needed to convince the Iranian regime to address the international community’s concerns about its illicit nuclear activities.”

SWIFT’s decision will put a dampener on Iran’s oil trade as it will hamper its ability to make or receive payments for crude oil which accounts for about half of the Iranian government’s revenues. Whilst China and India have said they will continue buying Iran’s oil, the Iranian government will need to “find workarounds for large, strategically important and government-facilitated oil payments”, such as gold. Just last week, in fact, the governor of Iran’s central bank said the country would accept payment in gold “without any reservation”.

It is Iranian businesses, however, that will bear the brunt of the measures. "It will make life even more difficult for us than before, because this is like our lifeline to the outside being cut," said Naser Shaker, who owns an oil and gas trading company in Dubai. The move will strangle Iranian businesses’ transactions and as a result cause the collapse of many banking relations.  Morteza Masoumzadeh, a member of the executive committee of the Iranian Business Council in Dubai, lamented that "this is devastating news for our businesses, but what can I do? Do we have any options?" Trevor Houser, an energy analyst and partner at Rhodium Group noted that SWIFT’s action will affect what Iran buys more than what it sells, as such “small Iranian businesses that rely on interbank electronic transfers to pay for everything from food to electronics imports are going to have a hard time buying from abroad”.

Last week’s move comes after a barrage of new measures adopted by the U.S. and EU since November as part of a concerted effort to stymie Iran’s nuclear ambitions by isolating its economy. The measures gained momentum after the United Nations International Atomic Energy Agency inspectors released a report on 8 November in which they cast doubt on the supposedly civilian purposes of Iran’s nuclear program.

Forced adoption in Australia

Greens senator Rachel Siewert

A Senate committee in Australia urged the Federal government on February 29 to “issue a formal statement of apology” for the widespread practice of forcing women to give up their babies for adoption between the 1950s and 1970s. Following an 18-month inquiry, the Community Affairs References Committee collected over 400 submissions to investigate the former forced adoption policies in the post-war period. The report noted that around 150,000 unmarried women were coerced into signing their children off for adoption by churches, doctors and adoption agencies among others.

Throughout the post-war period forced adoption was widespread across Australia, as mothers who were often in their teens or unmarried were coerced into giving up their babies or “faced circumstances in which they were left with no other choice”. This was partly due to the social stigma attached to unmarried motherhood up until the 1970s, resulting in single mothers often spending the majority of their pregnancy away from home. Many were sent away from their homes to “preclude prejudice or judgement from the local community” and were either housed with relatives or group accommodation settings. Religious organisations that ran the group accommodation settings were also involved in setting up the adoption, which was often a “routine and informal” process. The evidence collected also revealed that nurses and social workers almost always recommended adoption to single mothers.

At birth, the babies were usually removed immediately and kept on a separate floor until they were taken home by adoptive parents. This was in line with the “clean break” theory which was popular in the 1950s and 1960s; it held that “the best outcome for both the mother and child is achieved when the child is adopted at birth and no further contact occurs between them”. The clean break was vaunted as a means of avoiding the social stigma associated with the unmarried mother and “fatherless” child, as everyone could just forget about the “unfortunate” incident and move on. The committee heard harrowing stories from women who had been coerced into giving up their child by being drugged or even shackled to their beds. Others claimed their signatures had been forged or they simply had not been informed by social workers of government help that may have been available to them to raise their child, thus leading them to believe adoption was the only feasible route.

Greens senator and chairwoman of the committee Rachel Siewert broke down as she tabled the report in the Senate, saying it had been a "heartbreaking inquiry" and that it was "undoubted that past policies and practices have caused great harm and hurt to mothers, fathers, adoptees, and their family members". "It is time for governments and institutions involved to accept that such actions were wrong, not merely by today's standards but by the values and laws of the time", she continued. Labor senator Claire Moore added, "the history [...] will now be known and acknowledged [...] to the people caught up in the horror of this history, we can now call it a horror and not pretend it didn't happen". The release of the report, it seems, is merely the first step in redressing the harm caused.

Occupy London: a fading fad?

Outside St Paul's Cathedral

When the Occupy London movement pitched its tents in the churchyard of St Paul’s Cathedral in London last October it sent shockwaves through the suit-clad City workers to the whole country. Building on the momentum from other protest camps worldwide, such as Occupy Wall Street, the protesters outside St Paul’s denounced the capitalist system and the ensuing inequality. Commentators were keen to interpret the resurgence of protest movements as a portent of an imminent sea change in western society, perhaps fuelled by nostalgia for the social ferment of the 1960s. These predictions proved to be unfounded, or in any case premature. The excitement aroused by the camp soon died down as legal proceedings with the City of London Corporation got under way to ultimately result in the eviction of the protesters on 28 February. The Occupy movement in Zuccotti Park in New York had already been evicted back in December and Occupy Bath cleared the tents in Queen Square the same month. As Laurie Penny from the New Statesman wrote, “the political establishment is making its message clear, in the manner of a hostess trying gently to expel the last unwelcome guests at the end of a party: stretching, ostentatiously tidying up and talking loudly about how cold it is outside”. The question now is, what have these movements achieved? And will they be remembered?

To look for a concrete achievement one must first start from the objectives, and these were rather like a crème brulée: seemingly sturdy on the outside only to reveal themselves soft after you dig a little. Occupy London sought to fight corporate greed and “make [their] voices heard against the crisis which the banks have created”. Some very lofty aims indeed. But fighting corporate greed is not as clear cut as it seems, whilst making one’s voice heard need not take 5 months. Joan Smith, a human rights campaigner, believes that “once you’ve met your aims, it’s crucial to take your cause forward and I’m not sure continuing to stay outside St Paul’s Cathedral takes these protesters’ political objectives any further”.

Perhaps, then, we are wrong to look for concrete aims in the Occupy London protesters and even the movement worldwide. Michael Chessum, one of the leaders of the student protests, believes that developing concrete demands now would be premature. One must not interpret “fighting corporate greed” as an insular objective, for it is connected to a deeper societal malaise with the capitalist paradigm that has dominated western society for three decades. It would also be wrong to focus excessively on the “we are the 99%” mantra, for whilst the protesters do call for an end to the expanding schism between the super rich and the rest of society, they feel that the system has failed them as a whole, of which social inequality is simply one aspect. The Occupy London movement has thus been a “standing reminder that the force of capitalism may not be what its champions say it is”, raising awareness of the failings of capitalism simply through their presence and stimulating more public debate on the issue.

Awareness and debate may die down, however. Occupy London’s eviction did not elicit the same interest as its inception. Taken alone, the movement has neatly blended into the plethora of groups that make up our civil society, and its “anti-capitalist discourse has not disappeared so much as soaked in, like a stain into a carpet”. Yet context is key; the resurgence in social tumult over the past year signals that people are prepared to stand together and denounce what they perceive as an unfair system. This perception is strong enough to instigate protest camps and is unlikely to fade away simply because the tents have come down. Occupy London has not been an agent of change, but it has highlighted the extent of popular resentment with capitalism, whether founded or not, and is a prelude of more to come. We may not be in an interregnum between the crisis and a new system, but the discontent is there and clearly discernible. Meanwhile, life in St Paul’s churchyard will return to business as usual, replete with tourists and City acolytes.