New Documents Shine Light on Euro Birth Defects
By Sven Böll, Christian Reiermann, Michael Sauga and Klaus Wiegrefe
It was shortly before his departure to Brussels when the chancellor was overpowered by the sheer magnitude of the moment. Helmut Kohl said that the "weight of history" would become palpable on that weekend; the resolution to establish the monetary union, he said, was a reason for "joyful celebration."
Soon afterwards, on May 2, 1998, Kohl and his counterparts reached a momentous decision. Eleven countries were to become part of the new European currency, including Germany, France, the Benelux countries -- and Italy.
Now, 14 years later, the weight of history has indeed become extraordinary. But no one is in the mood to celebrate anymore. In fact, the mood was downright somber when current Chancellor Angela Merkel met with her Italian counterpart Mario Monti in Rome six weeks ago.
Even as the markets were already prematurely celebrating the end of the euro crisis, the chancellor warned: "Europe hasn't turned the corner yet." She also noted that new challenges would constantly emerge in the coming years. Her host conceded that his country had not even overcome the most critical phase yet, and that the fight to save the currency remained an "ongoing challenge."
It didn't take long for the two leaders' concerns to prove justified. The Spanish economy has continued its decline, interest rates for southern European government bonds are rising once again, and election results in both France and Greece have shown that citizens are tired of austerity programs. In short, no one can be certain that the monetary union will survive in the long term.
Many of the euro's problems can be traced to its birth defects. For political reasons, countries were included that weren't ready at the time. Furthermore, a common currency cannot survive on the long term if it is not backed by a political union. Even as the euro was being born, many experts warned that currency union members didn't belong together.
Pushing Ahead Regardless
But it wasn't just the experts. Documents from the Kohl administration, kept confidential until now, indicate that the euro's founding fathers were well aware of its deficits. And that they pushed ahead with the project regardless.
In response to a request by SPIEGEL, the German government has, for the first time, released hundreds of pages of documents from 1994 to 1998 on the introduction of the euro and the inclusion of Italy in the euro zone. They include reports from the German embassy in Rome, internal government memos and letters, and hand-written minutes of the chancellor's meetings.
The documents prove what was only assumed until now: Italy should never have been accepted into the common currency zone. The decision to invite Rome to join was based almost exclusively on political considerations at the expense of economic criteria. It also created a precedent for a much bigger mistake two years later, namely Greece's acceptance into the euro zone.
Instead of waiting until the economic requirements for a common currency were met, Kohl wanted to demonstrate that Germany, even after its reunification, remained profoundly European in its orientation. He even referred to the new currency as a "bit of a peace guarantee."
Of course, financial data doesn't play much of a role when it comes to war and peace. Italy became a perfect example of the steadfast belief of politicians that economic development would eventually conform to the visions of national leaders.
However, the Kohl administration cannot plead ignorance. In fact, the documents show that it was extremely well informed about the state of Italy's finances. Many austerity measures were merely window dressing -- either they were accounting tricks or were immediately dialed back when the political pressure subsided. It was a paradoxical situation. While Kohl pushed through the common currency against all resistance, his experts essentially confirmed the assessment of Gerhard Schröder, the center-left Social Democratic Party (SPD) candidate for the Chancellery at the time. Schröder called the euro a "sickly premature baby."
A Miraculous Cure
Operation "self-deception" began in December 1991, in an office building in the Dutch city of Maastricht, the capital of the southeastern province of Limburg. The European heads of state and government had come together to reach the decision of the century, namely to introduce the euro by 1999.
To ensure the stability of the new currency, strict accession criteria were agreed upon. Countries must have low rates of inflation, must have reduced new borrowing and must have their debt levels under control in order to be accepted. The European Commission and the European Monetary Institute (EMI) were to monitor developments, and European leaders were to reach the final decision in the spring of 1998.
As luck would have it, Italy fulfilled all requirements as the date approached -- surprisingly so, given that it had acquired a reputation for notoriously imbalanced budgets. But the country had undergone a miraculous cure -- on paper at least.
Officials at the German Chancellery in Bonn had their doubts. In February 1997, following a German-Italian summit, one official noted that the government in Rome had suddenly claimed, "to the great surprise of the Germans," that its budget deficit was smaller than indicated by the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD).
Shortly before the meeting, a senior German official had written in a memo that new posting rules for interest had alone resulted in a 0.26 percent decline in the Italian budget deficit.
A few months later Jürgen Stark, a state secretary in the German Finance Ministry, reported that the governments of Italy and Belgium had "exerted pressure on their central bank heads, contrary to the promised independence of the central banks." The top bankers were apparently supposed to ensure that the EMI's inspectors would "not take such a critical approach" to the debt levels of the two countries. In early 1998, the Italian treasury published such positive figures on the country's financial development that even a spokesman for the treasury described them as "astonishing."
In Maastricht, Kohl and other European leaders had agreed that the total debt of a euro candidate could be no more than 60 percent of its annual economic output, "unless the ratio is declining sufficiently and is rapidly approaching the reference value."
But Italy's debt level was twice that amount, and the country was only approaching the reference value at a snail's pace. Between 1994 and 1997, its debt ratio declined by all of three percentage points.
"A debt level of 120 percent meant that this convergence criterion could not be satisfied," says Stark today. "But the politically relevant question was: Can founding members of the European Economic Community be left out?"Government experts had known the answer for a long time. "Until well into 1997, we at the Finance Ministry did not believe that Italy would be able to satisfy the convergence criteria," says Klaus Regling, at the time, the Director-General for European and International Financial Relations at the Finance Ministry. Currently, Regling is the chief executive of the temporary euro bailout fund, the European Financial Stability Facility (EFSF).
The skepticism is reflected in the documents. On Feb. 3, 1997, the German Finance Ministry noted that in Rome "important structural cost-saving measures were almost completely omitted, out of consideration for the social consensus." On April 22, speaker's notes for the chancellor stated that there was "almost no chance" that "Italy will fulfill the criteria." On June 5, the economics department of the Chancellery reported that Italy's growth outlook was "moderate" and that progress on consolidation was "overrated."
In 1998, the decisive year for the introduction of the euro, nothing about this assessment had changed. In preparation for a meeting with an Italian government delegation on Jan. 22, State Secretary Stark noted that the "longevity of solid public finances" was "not yet guaranteed."
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