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Saving the Euro: Germany's New Envoy Insists 'We Will Prevail'
The Washington Diplomat / October 2011

By Larry Luxner

When Peter Ammon was growing up in Frankfurt in the 1960s, Germany was still divided by the Iron Curtain, and the coins jangling in his pocket were deutschmarks, not euros. Back then, the teenage hobby pilot — who befriended American airmen stationed at the U.S. Air Force base in nearby Freiburg — was far more interested in the music of Elvis Presley than the intricacies of European diplomacy.

But after earning a doctorate in economics and joining the ranks of the German Foreign Ministry, Ammon knew he’d one day end up in Washington.

“It’s something I always wanted,” he told us. “From 1999 to 2001, I was the economic minister at our embassy here. And now, 10 years later, I see that the dream of my life has come true.”

But Germany’s new ambassador to the United States hasn’t had much time to enjoy his dream.

Almost immediately, the 59-year-old veteran diplomat has been thrust into Europe’s escalating debt crisis as one nation after another faces a possible domino of default — and looks to Germany, the continent’s strongest economy, to help save the day, and quite possibly the euro and the entire project of European integration itself.

For German Chancellor Angela Merkel, the stakes couldn’t be higher. Merkel, whose party, the Christian Democratic Union, recently lost several state elections including one in her home state of Mecklenburg-West Pomerania, has been criticized for not acting more decisively to rescue the euro. But the 57-year-old leader is being torn between domestic politics and international expectations.

Without Germany onboard, the European Union’s heavily indebted members would be stranded in economic freefall. But pouring more money to shore up the euro risks the wrath of German voters tired of bankrolling their less-disciplined neighbors in the currency zone, beginning with Greece — whose economic size within the EU is negligible but whose default would still spark a financial panic — and reaching all the way to Italy, a G7 economy that most experts say is simply too big to bail out.

“Whenever it comes to taking up the burden from others, people say, ‘Why should I help my neighbor? I have already contributed so much,’” Ammon told The Washington Diplomat on Sept. 13, only four days after presenting his credentials to President Obama. “But we have to explain to our people that in the wider context, it is in the interests of all of us to build up Europe.”

The euro has certainly been in the interests of Germany’s 81 million citizens, who have enjoyed relative prosperity since the 2008 recession. The common currency has kept German exports ranging from Birkenstock sandals to BMWs relatively affordable for consumers around the world, making the country the world’s second-largest exporter after being overtaken by China last year.

“Let’s not kid ourselves. There is a massive benefit for Germany being in the euro,” said David Bloom, currency chief at HSBC in London, quoted in a Los Angeles Times article. “If Germany were not in the euro, its manufacturing sector would have been crushed.”

Ammon readily concedes that integration has been a boon for his country. But it’s also come at the expense of German taxpayers, who one analyst said “feel like they’ve been used as Europe’s piggy bank time and time again, with little to show for their generosity — which explains exactly why Merkel finds herself in such a pickle.”

“We have decided to stick to the euro, and the euro is a hallmark of this integration process. Of course we have a dilemma,” Ammon told The Diplomat, in a wide-ranging interview that marked his first with any American media outlet since taking office. “On one hand, we want the solidity of the euro, meaning that we must limit borrowing by individual states. And on the other hand, we are ready to show solidarity with states that are in a liquidity crisis. We have to balance these two elements, and this is a difficult political process.

“As always, if you ask your people for financial sacrifice in order to get a political project going, you have to convince them first. And that’s what is going on right now,” he said. “Germany has put its house in order. We started an austerity program many years ago, and we’ve been able to reduce our budget deficit this year to 1.5 percent of GDP. As you know, 3 percent is the Maastricht limit, and some countries are way beyond that. And it’s those countries borrowing massively on the financial markets that are in trouble.”

Germany has insisted that for these countries to receive bailout funds, they must adopt stringent budget-cutting measures to rein in their soaring debt.

Yet many experts warn that the prescription of fiscal austerity won’t immediately revive ailing economies like Greece — whose mountain of debt amounts to 150 percent of its GDP — and just might make them even sicker.

Raising taxes in a time of high unemployment and slashing budgets during a recession suppresses growth and recovery, which, in a vicious cycle, further erodes investor confidence. Yet at the same time, the fiscal recklessness that plunged bloated governments such as Greece — where tax evasion is practically a national pastime — has to fundamentally change as well.

A similar dilemma is confronting American policymakers as they seek to curb government debt while simultaneously trying to stimulate the economy and generate jobs. But the European Union’s economic woes are compounded by the fact that it was never a true common currency union like the U.S. federal government, with each EU member essentially free to determine their own debt and spending levels. The result has been highly disciplined, thriving economic powerhouses such as Germany sharing a common currency — but little else — with mismanaged basket cases such as Greece. And the tab for that awkward monetary union has come due.

Germany has already agreed to carry €220 billion (roughly $300 billion) of the guarantees made so far through Merkel’s backing of the Luxembourg-based European Financial Stability Facility (EFSF), the bailout fund created last year by the EU.

“This is an enormous amount of money and therefore an enormous show of solidarity to stabilize these countries at the periphery of the euro,” said Ammon. “Despite public resentment in some quarters, I’m quite sure she will prevail in the end.”

That resentment, however, is widespread and growing in Germany, whose own economy is showing signs of a slowdown. As Edmund Sanders of the Los Angeles Times pointed out, so far the country’s pledges to the EFSF have not resulted in any losses. And as long as recipient countries pay their debts, Germany shouldn’t suffer. But Germans are bitter that while they have a retirement age of 67, for instance, Greeks can retire with full pension benefits in their 50s.

More important, consumer confidence is falling — as is the likelihood of a planned middle-class tax cut — and the cost of insuring German bonds against default is rising due to investor concern about the country’s liability in future bailouts.

“People were angry about Greece, Ireland and Portugal, but they are much more worried about Spain and Italy,” Ferdinand Fichtner, chief economist at the German Institute for Economic Research, told the newspaper. “This brings a completely new dimension to the problem. Greece was a question of principle, not money. Now it’s a question of survival.”

By late October, the EFSF — which has an effective capacity of €440 billion — is set to take over from the European Central Bank the task of buying up distressed euro zone debt. On July 21, euro zone officials, led by Germany and France, agreed to bolster the EFSF to prop up Greece with more emergency loans and flexible financing, as well as extend relief to other troubled nations such as Ireland and Portugal.

Under the plan, part of a €109 billion rescue package for Athens, Greek bonds could be exchanged for new ones that have lower interest rates and longer maturities. The EFSF would also be empowered to buy government bonds on the secondary market and to help recapitalize some European banks — which might be needed when they write down the value of their Greek bonds.

“The new powers would effectively turn the facility into a prototype European monetary fund — a move that has long been resisted by Germany, the euro zone’s richest nation, but that has drawn the support of economists and government officials outside Europe,” wrote Landon Thomas Jr. and Stephen Castle in the New York Times. “Together, the various measures are intended to show that the euro zone’s leaders are committed to taking forceful policy measures — just as the United States and Britain did during the 2008 crisis — that will stem the spread of contagion.”

But the July plan to expand the EFSF must still be approved by each legislature in the 17-member euro zone, a process that could take until October — reflecting the challenges of a disparate monetary union in which members have been unwilling to cede control over their individual budgets to a central authority. Whether the lumbering EU bureaucracy can muster the unity for bold action that calms jittery markets and trumps domestic self-interests remains to be seen. Already, Finland demanded that Greece post collateral for its loans before it would approve the EFSF proposal, while Slovakia, the Netherlands and Austria have expressed opposition as well.

It’s also not clear how the plan will fare in Germany’s legislature. Last month, in a significant victory for Merkel, the German Constitutional Court upheld the legality of the country’s emergency loans to Greece, but ordered that any future bailouts must be approved by parliament. A vote to ratify the EFSF’s new and expanded powers is set for Sept. 29.

In the meantime, there’s been a range of other ideas floating around to stanch the debt crisis, which include: breaking up the currency zone into two and separating the stronger states from the weaker ones; introducing collective “euro bonds” that could replace individual government bonds; a controversial restructuring of Greece’s debt, forcing private investors to shoulder some of the losses; or kicking Athens out of the euro zone altogether.

Merkel and other EU leaders have firmly ruled that last possibility out. And despite criticism that she was hesitant in reacting to the crisis, Merkel has made it clear that Germany will do what it takes to ensure the euro’s survival.

“If the euro collapses, so does Europe,” she recently declared at a parliamentary budget debate. “Germany’s future is inseparable from Europe’s future.”

The origin of the 17-member euro zone itself dates back to talks between then-Chancellor Helmut Kohl and the late French President François Mitterrand. Both men are considered architects of the 1992 Maastricht Treaty, which created the EU and led to the establishment of a single European currency less than a decade later. The idea was that having a common currency, the euro, would make EU member states more competitive on an international scale while encouraging economic, and ultimately, political integration. The plan worked and, in a fairly short span of time, turned the EU into a global economic heavyweight, although few economists imagined that the euro zone would find itself in such dire straits seemingly just as quickly.

But that’s what has happened in the wake of a possible default by Greece, which could, at least theoretically, force it to withdraw from the euro club — prompting widespread panic throughout the global financial system.

The Greek drama began unfolding in late 2009, by which time years of over-borrowing had already pushed the country’s budget deficit to 15.4 percent of GDP. Dramatically higher borrowing costs sparked by Greece’s ballooning debt levels triggered an economic crisis that crippled industrial activity and eventually put nearly 1 million Greeks out of work.

In May 2010, the government of Prime Minister George Papandreou proposed a series of desperate austerity measures, clearing the way for a €110 billion EU-International Monetary Fund loan package. But the planned spending cuts and tax hikes were so painful that hundreds of thousands of ordinary Greeks have rallied against the measures for months — themselves pushing for Greece to drop the euro.

Papandreou’s government has managed to hang on so far, announcing further measures such as a one-time property tax to convince the EU and IMF that it was doing all it could to close its budget gap, and to receive the next tranche of loans. At the same time, Greek officials have warned that the country’s recession is deepening. Finance Minister Evangelos Venizelos recently noted that GDP was expected to contract 5.3 percent in 2011, worse than the 3.8 percent decline forecast in May.

However, the German ambassador appears to have little sympathy for Greece, which only a decade ago had a lower standard of living than most of Central Europe.

“Over the past 10 years, Greece has seen some of the highest growth rates in the EU, but this extremely high growth was fueled by government taking on debt with no holds,” Ammon said. “Wages went up as GDP went up. But what kind of investment do you have in Greece? There’s very little. They didn’t invest enough of the money — they borrowed; they consumed too much.”

He also suggested that “if you want to readjust the Greek economy to a situation where there is no outside debt flowing into the country, then certainly the GDP will fall. This is inevitable. Nothing can go on forever. At some point, the two curves will meet, and you will have stability.”

Yet Fareed Zakaria, echoing most observers, argues in the Washington Post that Europe’s real problem isn’t Greece, but Italy.

“Greece is a nano-state, representing 2 percent of the European Union’s gross domestic product. Italy is a G7 country,” he pointed out. “Italy’s debt is €1.2 trillion, or 120 percent of its economy and greater than the debts of Spain, Portugal, Ireland and Greece combined. Italy’s bonds are trading at 4 percent more than those of Germany, unprecedented in the euro’s history and unsustainable. Italy is too big to fail but might also be too big to bail.”

Zakaria, in his column titled “How China Can Help Europe Get Out of Debt,” also notes that the German people and government are adamantly opposed to the creation of “euro bonds,” which would allow Germany to guarantee the debt of its less-disciplined neighbors in the euro zone — not to mention the fact that German courts have ruled that the proposed bonds would be unconstitutional.

“The minute such bonds are floated, Italy, Greece and the others would lose all incentive to make painful reforms; they could borrow all the money they need at German-subsidized rates, so why go through the dreary work of restructuring?” Zakaria wrote. “The Germans know this — hence their opposition.”

In any event, said Ammon, Berlin has behaved far more responsibly than Athens over the years when it comes to finances.

“We discovered early on that an economic boom built on debt is not sustainable. So we changed our constitution to isolate the decision making from daily political bickering to make sure we brought down our deficit,” the ambassador explained. “We are now down to 1.5 percent of GDP and in coming years, we will have to bring the debt to 0.3 percent of GDP. That’s in the constitution, [but] there is always political pressure by special interest groups to raise debt for one project or another.”

Ammon also said that his government has begun renovating Germany’s social welfare system “so that people who are out of work have a strong interest to enter the workforce again. That’s why we have increased our spending on education and on science and technology.”

Ammon, who briefly served as Germany’s ambassador to France and has spent the last 10 years dealing with economic matters in the German Foreign Ministry, spoke to us the day before Merkel, Papandreou and French President Nicolas Sarkozy held a teleconference call, after which all three reiterated that Greece’s future is indeed anchored in the euro zone. U.S. Treasury Secretary Timothy Geithner said at a conference in New York that Merkel assured him she won’t allow a financial collapse like the one that followed the 2008 bankruptcy of Lehman Brothers.

Immediately after that, the European Central Bank — acting in concert with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank — said it would allow banks to borrow U.S. dollars for up to three months, instead of just for one week as before. The Sept. 15 announcement marked the first such coordinated effort to pump dollars into European banks since May 2010. As the New York Times noted, “the central banks seemed determined to demonstrate that they would not hesitate to deploy their combined weight to keep the European sovereign debt crisis from leading to a collapse of the euro zone.”

But in the long run, the EU needs a mechanism that is “lacking” in the current European framework, argues Ammon, so that countries like Greece will be forced to keep their fiscal house in order.

“This mechanism must be very strong and must be able to limit the borrowing of individual countries. Until now, each country has been able to go to the markets and borrow as much as they like, and there is no legal recourse against this,” he told us, pointing out that on other, lesser, issues, the European Court of Justice in Luxembourg has taken harsh action.

“Germany has been convicted by the court on many issues where we weren’t quick enough to implement certain rules,” he complained. “You can get a verdict from the court in Luxembourg on relatively unimportant administrative things, but if a country’s deficit is out of control, the court is powerless. I believe that in the long run, there will be an element of regulation that will address this.”

Meanwhile, don’t expect much good news to come out of Europe this year — at least not when it comes to the economy.

Growth across the EU is now projected at 1.7 percent for 2011, and will have slowed to a “virtual standstill” by year’s end, warned the European Commission in a gloomy report, with growth at only 0.2 percent in the third and fourth quarters of this year. It added that fiscal austerity measures across the continent and beyond could also “weigh more on domestic demand than currently envisaged.”

The commission also lowered its growth projection for Germany to 0.4 percent for the third quarter of 2011 and 0.2 percent for the fourth, down from its previous outlook of 0.5 percent for each quarter.

“The outlook for the European economy has deteriorated,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement. “The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy.”

Even so, an outright recession appears unlikely, says Ammon, whose own expertise includes a doctorate in economics from Berlin’s Free University. After his first stint in Washington ended in 2001, Ammon became director-general for economics at the German Foreign Office, where he helped prepare the G8 world economic summits for former Chancellor Gerhard Schröder and later Merkel. He’s also served as a career diplomat in London, Dakar, New Delhi and Paris.

Asked how he plans to allocate his time as ambassador in Washington, Ammon said, “I think we are entering into a new phase of history. New superpowers are emerging, and we see that the United States and Germany have so many common interests that should define their role in the world jointly. I believe my role could be to facilitate this economic liaison further.”

A staunch advocate of free trade, Ammon said business transactions between the United States and the EU account for some 40 percent of global commerce, and that the potential for transatlantic growth is enormous — especially when it comes to green technologies like the electric car (Germany is considered a leader in the green movement). “Standards are being set right now by companies, but if we don’t find common transatlantic standards, these standards will be set by others,” he warned.

Common interests linking Washington and Berlin aren’t limited to the economic realm, Ammon adds. In his Sept. 9 Oval Office meeting with Obama, the new ambassador stressed not only the fact that German investment in U.S. industry has led to the creation of more than 650,000 American jobs, but also Germany’s declaration of unconditional solidarity with the United States in the days after 9/11.

“Germany and the United States are reliable partners in the fight against international terrorism,” he said. “For nearly 10 years now, Germany has been working for a peaceful and democratic development in Afghanistan — as the third-largest troop contributor to the NATO-led ISAF mission, through police training, through the construction of schools, and through massive amounts of aid for the economic development of the country.”

Ammon told The Diplomat that “we are also engaged in the political process. On Dec. 6 we have a conference in Bonn by which we hope to take the political reconciliation process in Afghanistan one step further.” Another hotspot is Libya, where NATO partners France and Great Britain clearly took the lead in helping the rebels dislodge the country’s longtime dictator, Col. Muammar Qaddafi, from Tripoli after 42 years in power.

“It’s very good that Qaddafi is gone,” said Ammon, “and the chancellor has made it public that we will help the Libyans in their difficult way out of this situation by reconstruction and rebuilding institutions of Libyan civil society.”

Yet unlike their French and British partners in NATO, Germany abstained from the U.N. Security Council resolution authorizing the military operation — to the surprise of many. And once the bombing mission was under way, Germany pulled forces out of NATO amid disagreements over who exactly was running the show, further fueling criticism that Berlin was turning inward and losing clout on the world stage.

As a result, wrote Deutsche Welle commentator Daniel Scheschkewitz, “German companies might not be the first choice when Libyans begin looking for new investments, but they also won’t be the last. Germany’s know-how is too highly valued in the Arab world to simply dismiss Berlin.”

He added: “Germany’s particular experience with the transition from dictatorship to democracy can — certainly in the long run — be of crucial help to post-Gadhafi Libya. And if a united Europe will be helping Libya’s transition towards a free and democratic future, Germany will certainly be part of this.”

More immediately on the horizon, Germans will celebrate their own transition to democracy on Oct. 3 as they mark the 21st anniversary of the country’s 1990 reunification. This year, the focus of Unity Day festivities will be Bonn, the former capital of West Germany.

For all the current handwringing over Europe’s economic uncertainty and Merkel’s reluctant commitment to save the euro zone from collapse, it seems that Germans miss their old deutschmarks about as much as they miss the Berlin Wall.

“In the beginning there was some nostalgia, but this has disappeared over time,” Ammon told us. “Today, anybody who is in his right mind knows there is no technical fix to reintroducing the deutschmark. It would be a nightmare. And no political party that has more than 5 percent support in Germany advocates that anyway.”

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