Schmidt: Leadership wanted in Europe
Former German Chancellor Helmut Schmidt sits down for an exclusive interview with David Marsh, a MarketWatch columnist and co-chairman of the Official Monetary and Financial Institutions Forum. A Social Democrat, Schmidt was chancellor of West Germany from 1974 to 1982. He also served as finance minister, economics minister, and defense minister.
December 7, 2010
HAMBURG, Germany (MarketWatch) — Celebrating his 92nd birthday later this month, former German Chancellor Helmut Schmidt is as penetrating as ever in his political and economic judgments, as a long conversation with him in his Hamburg office shows.
David Marsh: For many years Germany had twin policies on parallel lines: commitment to financial and monetary stability on the one hand, commitment to European integration on the other. With the crisis in economic and monetary union, do you think that the two policies are no longer compatible?
Helmut Schmidt: Let me give you an answer first about the general political environment. I don’t know about the British government — they are rather new in office and I do not know the leading people. So I exclude the British from my general answer. But I would say that, in general, Europe lacks leaders. It lacks people in high positions in the national states or in the European institutions with sufficient overview of domestic and international questions and sufficient power of judgment. There are a few exceptions such as [Prime Minister Jean-Claude] Juncker of Luxembourg, but Luxembourg is a bit too small to play a substantial role.
More specifically, I do not think that the Germans in general or the German political class in Germany have given up on stability. The circumstances in 2008-10 forced them — like almost everyone else in the world — to violate their stability ideals, but this was not an act of free will, it was the result of economic downturn.
Additionally, the present German government is composed of people who are learning their business on the job. They have no previous experience in world political affairs or in world economic affairs. German Finance Minister Wolfgang Schäuble is a man whom I wish well and for whom I have great personal respect. He well understands budgetary and taxation problems. But when it comes to international money markets or capital markets or the banking system or the supervision of banks or shadow banks, this is all new to him. The same goes for [Chancellor Angela] Merkel. This is not to say anything negative about Schäuble or anything negative about Merkel, but we need people in high office who understand the economic world of today.
Marsh: But some people would say the problem goes deeper than that. By going into a monetary union without political union, and without the perspective of a political union, some people would say that this was a fundamental birth defect.
Schmidt: This is what the Bundesbank have been repeating it for 30 years. In their innermost heart they are reactionaries. They are against European integration.
Marsh: Who do you mean precisely? Who are you thinking of, because people like [former Bundesbank President Hans] Tietmeyer are no longer playing an important role?
Schmidt: But his successors, more or less with one exception, are reactionaries with regard to European integration. They are not really characterized by liberal thinking. They tend to act and react too much under the aspect of national interests and haven’t understood the strategic necessity of European integration.
Marsh: There is this expression: Beim Geld hört die Freundschaft auf. [Friendship stops with money.]. One has the feeling that the Germans are now being asked as a collectivity to help the poorer states. And the Germans find this very difficult.
Schmidt: The mistake was made around the time of Maastricht, in 1991-92. At this time we were 12 member countries in Europe. They not only invited everybody to become a member of European Union but they also invented the euro and invited everybody to become a member of the euro area. And this was done without changing the rules or clarifying the rules beforehand. This was when the great mistakes were made. What we are suffering now is the consequence of that failure.
Marsh: Should the EU states have decided the euro just for a small group of countries?
Schmidt: This is my view — and also they should have defined more strongly the rules on the economic behavior of the participants. The so-called Stability and Growth Pact is not an instrument of law. It’s just an agreement between governments. And it was not helpful that, early in this century, both France and Germany violated the rules of the pact. Merkel would like to correct this mistake, but her chances of prevailing are rather small, particularly because she is not a very smooth operator.
Marsh: In his heart of hearts, Hans Tietmeyer didn’t want the Italians in EMU. You criticized him in the mid-1990s for being a German nationalist because he said then that we should have a hard core. Aren’t you now backing the same argument?
Schmidt: In the meantime many things have happened, the globalization of speculation, the globalization of money and capital markets, the globalization of financial instruments. We have seen the failure of a draft for a European constitution. We have seen this complex Lisbon treaty, many things have happened, and at the same time figures who could lead have become scarce. One very important figure was [former European Commission President] Jacques Delors . He has been replaced by people whose name one doesn’t really know. And the same goes for permanent secretaries and the chairmen of various commissions and for prime ministers and — what is his name — [European Council President Herman] Van Rompuy? And he has a so-called foreign secretary — a British lady, her name is not necessary to know either. The same goes, more or less, for the European Parliament. The only figure who sticks out in the European institutions is [European Central Bank President Jean-Claude] Trichet. I’m not sure how strong he is inside the European Central Bank, But, as far as I can see, he hasn’t made a major mistake so far.
Marsh: But of course the clock is now ticking for him. His mandate runs out at the end of October and he cannot be renewed.
Schmidt: Yes I know. But of course he’s totally independent. In a way this could give him the freedom to speak up, but the question is who would listen to him now that he has to leave his office in less than 12 months or so.
Marsh: Greece and Portugal went into monetary union with a net foreign balance more or less of zero: their foreign assets and foreign debts were more or less equivalent. Then they ran current account deficits every year for around 10 years of 10% of gross national product. You don’t need to be a genius to work out that they now have a net foreign debt of 100% of GDP.
Schmidt: The question is: How come that no one took any notice — in Basel or in Brussels or in some statistical office? No one seems to have understood. By the way, for a long period the German political elite didn’t understand that we were recording surpluses on our current account. We are doing the same thing as the Chinese — the great difference is that the Chinese have their own currency and we haven’t. If we had our own currency it would have been revalued by now. To have kept the D-Mark, as Tietmeyer would have liked, would have led to speculation against the D-Mark at least once if not twice in the past 20 years in an order of magnitude worse than we have seen with Greece or Ireland. So far the idea of a common currency still has my full backing, even if the European leaders did fail to set the rules and made the enormous mistake to take in anybody.
Over the next 20 years, I think it is rather likely, at least 51% likely, that a hard core of the European Union will emerge. And it would comprise the French, the Germans, the Dutch — I’m not so sure about the Italians. I’m rather sure than the British would not be part of it, the same may come true of the Poles. It would not be a hard core in written paragraphs of paper but it would be a hard core de facto and not de jure.
Marsh: And of course the Benelux states would be part of this and Austria and probably Denmark and Sweden
Schmidt: Probably Austria, conceivably Denmark and Sweden. The Danes are very cautious — they would still look to London.
Marsh: I remember you saying many times, if the Germans keep the D-Mark we will make ourselves unpopular with the rest of the world; our banks and our currency would be the Number 1, all the other countries would be against us and that was why we should have the euro to embed us in a larger European undertaking. It’s all rather ironic, because people are saying that Germany has profited a great deal from the euro because the D-Mark has been kept down and this helps German exports.
Schmidt: I ask myself whether this profit really is a profit? I wonder whether running perpetual current account surpluses really amounts to a profit. In the long run it is not a profit…
Marsh: Because in the long run these assets will have to be written down because people won’t pay them back …
Schmidt: Yes … it means that you sell goods and what you get back is just paper money and later on it will be devalued and you will have to write it off. So you are withholding from your own nation goods that otherwise they would like to consume.
Marsh: Would you say that in 20 years, if we have a hard bloc, that the currency would be higher than now?
Schmidt: Not necessarily would this [the hard core] pertain to the field of currencies but it would probably pertain to the field of world policies whether vis-á-vis China, Iran, Afghanistan or a new coalition of Muslim states, which is one of the great dangers of the 21st century, that you get a coalition of Muslim states. If there was a president in Washington and he wanted to drop the atomic bomb on Tehran, the Europeans would be strong enough to say: “We are not part of it.” Right now, no one is strong enough in Europe to be in that position.
Marsh: And what about France? They are always torn both ways — to the south but also to Germany. Do you think it’s irrefutable that France will always opt to go along with Germany in a smaller core monetary union?
Schmidt: It’s difficult to say. I said the probability would be 51% — that makes 49% left. I am not a prophet. I don’t know. It depends very much on the behavior of the Germans. When I was in power, I would always let the French march ahead on the red carpet. I never appeared as the leader, apart from once — over medium-range nuclear missiles that were targeted against German cities — and in the end that cost me my office.
Marsh: And of course [French President François] Mitterrand came to Bonn in January 1983 after you had left office — the invitation came from you when you were chancellor. He made his great speech [supporting West Germany on medium-range missiles] and [Chancellor Helmut] Kohl reaped the benefits of that French solidarity. It is ironic how history turns out….
Schmidt: Yes, but this has had a good effect, since in 1987 they abolished all these weapons on both sides.
Marsh: People always said: “We don’t want a German Europe but a European Germany.” However, there is now a belief that, because of Germany’s power as the greatest Europe creditor nation, it is throwing its weight around too much in Europe.
Schmidt: My feeling is that Merkel doesn’t know she does it.
Marsh: Maybe if you are a creditor, maybe you’re vulnerable, you feel that your assets are going to be written down. Maybe it’s not good to be a creditor because it makes you unpopular. Maybe it also means that your bank balance, your reserves are always going to be less high than you thought they would be, because people are not going to be able to repay their debts …
Schmidt: It goes far beyond the question of currencies and currency reserves. And therefore it applies to psychology … I am speaking of the psychology of nations and their public opinions and their published opinions. [Because of the Nazis and the Second World War] Germany will remain in debt for a long time — for all of the 21st century, maybe even for the 22nd century too. The Germans indeed sometimes behave like the strongest nation, they tend to give lessons to everybody. In fact they are more vulnerable than they think.
Marsh: But the Germans themselves don’t feel strong, the man in the street feels, I think, somewhat uncertain; the wages in real terms have been under pressure for many years. The average Germans don’t feel strong and confident, I think.
Schmidt: That is probably correct. But that does not include the political class. That does not necessarily include the right wing of Christian Democrats. And it doesn’t necessarily include the extreme left.
Marsh: Europe thought it could put crises behind us by getting rid of its internal exchange rates and forging monetary union. But it now seems that, because of the globalization of finance, the speculators will now attack the spreads [between different countries’ bond yields]. Before they attacked the currencies, now they attack the bond markets.
Schmidt: One of the weakest points in the global economy is that there is no control of the behavior of financial managers. You can divide mankind into three categories. In the first category are normal people like you and me. We may have once stolen an apple from a neighbor’s trees when we were boys, or we may have taken a bar of chocolate from a supermarket without paying for it. But otherwise we are dependable, normal human beings. Then secondly you have a small category of people with a criminal character. And thirdly you have investment bankers. That includes all the dealers and the deal makers. They all sail under different names, but they’re all the same.
Marsh: What about Britain? You had a very good relationship with [former Prime Minister James] Callaghan but he didn’t join the European Monetary System. Do you think we did right to steer clear of monetary union? I know you think we will be outside for a long time and I think you’re right. Do you think that was fundamentally the correct decision?
Schmidt: Fundamentally I think [French President Charles] de Gaulle was right — long before the European Monetary System
Marsh: You mean he was right in believing that the U.K. would always choose the U.S. over Europe?
Schmidt: I used to believe in British common sense and the British state rationale. I was brought up in a very Anglophile way. I was a great supporter of Edward Heath who brought Britain into the European community. But then we had Harold Wilson and Margaret Thatcher, who didn’t always behave so sensibly. and then we had Tony Blair who brought himself into a position of far too great a dependence on America. You can’t have this dependence on America and at the same time play a responsible role in Europe. The British have always been good, though, at muddling through — and this is what we are doing now in Europe, muddling through.
Originally Posted by Dreadnaught
I use larger amounts of money for safer investments that pay dividends and aim to hold them for a long time. Though my stupid investment in BP this summer has also paid off.
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