Wolfgang Schäuble is gone but his disastrous legacy will continue

History is often made by single, very powerful individuals acting on their own mission according to their own calling. Many of these individuals are seemingly immune to the reality around them and try to recreate their own reality – sometimes succeeding to advance the well-being of those around them and beyond, but, usually, they just leave the main stage after creating havoc. I could name names. But only one name is relevant for today’s blog – Wolfgang Schäuble, the former CDU German Minister for Finance. Schäuble resigned that role after the recent German elections and is now being feted by the mainstream press as some sort of visionary who kept the Eurozone together through his disciplined thinking and his resistance to populist ideas that would have broken the discipline imposed on Member States by the European Finance Ministers. History tells us differently. He has overseen a disastrous period in European history where its major step towards political and economic integration in the 1990s has delivered dysfunctional and divergent outcomes for the Member States. Some countries (Greece) has been ruined by the policies he championed while others are in serious trouble. Further, despite him claiming the monetary union has been successful, the fact is that the Eurozone is still together only because the ECB has been effectively violating the no bailout articles of the Treaty of Lisbon via its various quantitative easing programs since May 2010. Should it stayed within the ‘law’ of the union, then several nations would have been forced into insolvency between 2010 and 2012. The problem is that while Schäuble is now gone from the political stage, his disastrous legacy will continue.

He recorded an interview with the Financial Times (October 9, 2017) – Transcript: Wolfgang Schäuble bids farewell to the eurogroup – where he reflected on his contribution to the Eurogroup (Eurozone finance ministers), the central economic policy unit of the European Commission.

It was an incredible interview and confirms the view that Schäuble’s goals were quite different to those who might seek to promote general advancement of well-being.

He was asked what he was “most proud of” as a member of the Eurogroup and replied:

I’m very happy that we succeeded … in making the euro more stable than many would have believed possible … I think that shows that we pursued adequate and successful policies.

But fails to mention that the only reason the Eurozone is still together is that the ECB has been effectively violating the no bailout articles of the Treaty of Lisbon via its various quantitative easing programs since May 2010.

While the ECB claims these operations were just liquidity operations (reserve maintenance) the reality is quite different. They might only be buying government bonds in the secondary market but the impact is the same as if they were just buying the debt in the primary issuance stage.

So “we” didn’t succeed. The continuation of the euro is only down to the central bank breaking the law. Without that breach, it would have been curtains, at least for several of the nations (Italy and Spain to name notable examples).

In reflecting on his “regrets”, he said (among other things):

… And of course the side effect of that during the euro crisis was that the ECB had to play a bigger role in overcoming the crisis than it really wanted to. Mario Draghi always said the ECB can never replace what the member states should do. But as long as the member states don’t do it, the ECB must do what it can, within the framework of its own limited mandate …

Recognition and denial of the previous point. The ECB has effectively become the currency-issuer and the fiscal agent for the eurozone, quite a different role that is specified in its “limited mandate”.

The denial continues – that the ECB has been operating within its “limited mandate”. It has exceeded its role and violated Article 125 of the Lisbon Treaty.

This all comes after Schäuble released a parting, 3-page – Non-paper for paving the way towards a Stability Union – the title being the tell tale.

Schäuble’s ‘non-paper’ (whatever that signal was meant to convey) indicates why Germany will never accept a broad, risk-sharing structure within the Eurozone as has been proposed by the new French President Emmanual Macron.

Schäuble’s vision is ‘business as usual’, with even tougher enforcement at the central level.

Three “core principles” are presented:

(1) We must keep fiscal responsibilities and control together, to avoid moral hazard.

(2) We need better instruments to foster the implementation of structural reforms.

(3) We need credible stabilization functions to deal with global or domestic shocks.

In terms of the first principle, one could have no objection the statement, although I would add that there is a third element beyond ‘responsibility’ and ‘control’ – which is required to ensure that fiscal policy can be both accountable within the parameters of the democracy operating and effectively implemented.

That third element is the currency-issuance capacity.

You cannot have effective fiscal policy if you only have a ‘control’ function operating. You cannot have democratic accountability if the voters cannot change those making the decisions.

Which is why the Eurozone is effectively dysfunctional and relies on the ECB breaking its own rules for its continuance.

A properly functioning federation with democratic accountability has to follow three design principles:

1. Fiscal policy (spending and taxation) should be aligned at the federal level with the currency-issuance (central bank) functions. This means that the ‘federal government’ can ensure that asymmetric spending shocks to the federation (that is, which impact differentially on the ‘regions’ within the federation) can be attenuated with appropriate fiscal transfers.

2. The use of the term ‘federal government’ is pertinent – the fiscal agency has to be the responsibility and under the control of elected politicians rather than unaccountable technocrats.

3. The ‘states’ within the federation can have their own fiscal functions according to their own political agendas but the federal level is responsible for the general well-being of the ‘country’ (the ‘federation’). Some ‘federal-state’ arrangement has to be in place to ensure that the states don’t game the federation but, ultimately, in a crisis, the ‘federal’ government has to stand ready to ensure living standards are broadly comparable across all regions.

Wolfgang Schäuble’s vision is quite different and explains why the Eurozone is never likely to become a functional federation.

His ‘non-paper’ explains that “there is little willingness” among Member States to move towards a federation of the type outlined above (in his words “transfer parts of national sovereignty and control of fiscal rules to the EU level (‘Euro Finance Minister’), together with a greater democratic legitimacy”).

The alternative?

The creation of a European Monetary Fund (EMF), which would just extend the existing European Stability Mechanism, “to provide temporary financial support under strict reform conditionality”.

So a European version of the IMF – keep a government solvent but force it to introduce scorched earth policy choices when it is beset with a negative non-government spending shock.

In other words, entrench the practice of pro-cyclical fiscal policy (cutting public net spending when non-government spending is declining), which is the anathema of sound fiscal practice.

Further, Schäuble writes that:

It is therefore important to expand the ESM’s radar and give it a stronger role in terms of monitoring country risks. The aim is to identify, in cooperation with other institutions, stability risks for and in Eurozone member states more effectively and at an earlier stage than in the past, and to monitor these risks so that they can be reduced by the affected countries themselves. The IMF’s Article IV consultations could serve as a blueprint for this new role.

Such a role for the ESM should also include monitoring compliance with the Member States’ obligations under the Fiscal Compact that was adopted in 2012. The ESM could gradually be given a stronger, neutral role with regard to the monitoring of the Stability and Growth Pact.

In other words, technocrats working within the ESM would be empowered to delve into Member State finances and impose conditionality where it thought the State was likely to (or was) violating the fiscal rules (Fiscal Compact).

Nothing democratic in that.

Nothing engendering responsible fiscal policy, where the aim is to advance well-being rather than adherence to inappropriate and context-free fiscal rules.

Further, the ESM would force defaults onto insolvent Member States and the losses would be pushed onto “private creditors” under a sharing arrangement with the ESM.

The ESM would not be a buttress to Member States struggling to meet the fiscal rules. Schäuble explicitly rejects the idea of creating a ‘federal fiscal capacity’:

More ambitious scenarios and plans for the ESM and its financial capacities, either regarding the possible role as an additional backstop for the controversial European Deposit Insurance Scheme, or regarding a brand new fiscal capacity as a transfer mechanism for the Eurozone would put much too great a strain on the ESM and go against its core purpose of bailing-out countries in severe trouble.

That is, Germany remains firmly opposed to reforms that might render the Eurozone functional and capable of supporting sustained prosperity.

And for the historians among us, Schäuble’s insistence on a ESM watchdog recalls the original German proposal advanced in 1995.

Recall that in November 1995, the then German Finance Minister Theo Waigel circulated a Memorandum in which he proposed a ‘Stability Pact’ to restrict government fiscal policy discretion. The Maastricht Treaty had left the fiscal side of the EMU up in the air.

The Treaty included articles relating to the coordination and monitoring of Member State budgets and the ‘excessive deficit procedure’ but suggested that the detail, which was outlined in the Protocol attached to Article 104, would require further legislation and incorporation into the Treaty.

The genus of Waigel’s ‘Communication’ came after the German Federal Constitutional Court ruling on October 12, 1993, which gave the green light to the German Parliament to approve Germany’s entry into the EMU on the condition that price stability would be a primary objective of the monetary system.

The Court’s decision and the publicity that surrounded the case brought home to the German government the degree of public hostility about the impending EMU membership.

Wegel told the Bundestag on November 7, 1995 that he was “proposing a Stability Pact for Europe as a binding commitment by the participants in the third stage of the EMU”.

He indicated that the ‘Stability Pact’ should limit fiscal deficits to 3 per cent (in unfavourable periods). In normal periods, the deficit should never exceed 1 per cent of GDP, which meant his proposal was even more extreme than the approach than had been floated at Maastricht earlier in the decade.

Wegel pushed his idea to the Ecofin (Eurogroup) Council meeting in Brussels on November 27, 1995. They were concerned because he wanted a harsher regime imposed than outlined in the Treaty of Maastricht and also proposed to work outside of the normal European Commission institutions.

As part of his proposed ‘Stability Pact’, he wanted to secure an intergovernmental agreement to set up the “European Stability Council” which would manage the surveillance and compliance processes of the Pact.

It would impose harsh penalties and other sanctions on nations that breached the rules.

History shows us that France, Spain and Italy resisted Wegel’s plan.

Waigel failed to demonstrate how the rigid rules he wanted enforced could underpin economic growth and low unemployment. He just maintained the mantra that price stability would reduce the transaction costs, which he asserted would encourage investment.

Further, the idea that a nation, facing a major decline in private spending, which had forced its deficit above 3 per cent, would then face a significant fine was idiotic. The penalty would further reduce the ‘offending’ nation’s capacity to provide fiscal support to the economy in bad times and worsen unemployment.

By the end of 1996, Waigel’s ‘Stability Pact’ had become the ‘Stability and Growth Pact’ after a screaming match between French President Chirac and German Chancellor Kohl.

Wegel’s French counterpart told him that “What you are proposing is a computer that takes the decisions. Policy by Software”.

I cover this period in detail in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale.

Schäuble also rejects any suggestion that the current fiscal framework, whereby Member States bear the primary responsibility for spending and taxation but are forced to limit the flexibility to keep within the Fiscal Compact is dysfunctional.

He claims:

The flexibility in our fiscal rules exists exactly to allow them to work.

Given the main economic indicators have been diverging rather than converging across the Member States since the crisis one wonders what a working outcome is in Schäuble’s view.

With unemployment still above 21 per cent in Greece, around 17 per cent in Spain and high in many other Member States, the system is clearly not working.

There is a clear relationship between the fiscal austerity and the divergent outcomes, which brings into question the ‘flexibility’ of the rules.

Clearly, there is insufficient flexibility for a Member State struggling with a major spending collapse within the rules. The crisis showed that the automatic stabiliser component alone blew the fiscal deficits beyond the allowable limits and invoked the Excessive Deficit Mechanisms (with austerity imposed as a result).

He also wrote that:

… a new fiscal capacity or unemployment insurance is economically not necessary for a stable monetary union. Countercyclical public spending is never in time …

That is categorical.

And this is the standard mainstream line that characters such as Milton Friedman used to disabuse the notion of activist discretionary fiscal policy – the lags are too long and so fiscal policy becomes pro-cyclical – by the time, the government gets its act together, the non-government spending has recovered and so the fiscal stimulus just overheats the economy.

First, the fiscal rules in the Eurozone are largely pro-cyclical anyway as noted above.

Second, the lessons of the crisis is that governments that became pragmatic and rejected the ideological antagonism to deficits found effective ways to spend money and reduce the impact of the collapse in non-government spending.

Third, a program such as the Job Guarantee, would immediately chime in as the non-government sector contracted – people would move very quickly into paid work (which was designed in advance to be operational) rather than, as they do now, move into the unemployment queue.

Finally, Schäuble thinks that Member States suffering “asymmetric shocks” then “better migration within the EU27 could offer a much stronger possibility to keep unemployment … under control in case of crisis.”

It is quite clear that intra-Europe migration is insufficient despite the relaxation in rules (Shengen) to reduce the gross disparity in unemployment rates across Europe.

What other features of the ESM tell us that Schäuble hasn’t worked out that the ‘German-view’ on Europe is dysfunctional.

The idea that the ESM would engage in insolvency procedures immediately tells us that Schäuble has no truck with the Eurozone being a functioning monetary union.

In fact, what he is proposing is redolent of the unworkable pre-Maastricht situation where countries with external deficits were forced to offer higher interest rates to prevent currency depreciation.

The difference now is that the bond markets would force Member States who were struggling with fiscal deficits due to recessed domestic conditions and facing default risk to pay higher yields on any debt issued.

While all Member States face default (credit) risk on the debt they issue because they do not issue their own currency, economies facing recession would face intolerable demands from the bond markets.

The spiral to insolvency would then be accelerated just as the currency crises in the 1970s and 1980s were self-fulfilling because of the insistence of Member State governments in retaining unsustainable fixed parities against the powerful German mark.

In his Financial Times interview, Schäuble said that “The euro should be the currency of the whole EU. We need to reach a point where the whole of the EU uses it.”

However, Schäuble proposal to introduce the ESM would provide a massive disincentive to the remaining European nations to surrender their own currency and join the EMU.

The reliance on bond markets to discipline and ultimately, force governments into insolvency is a recipe for chaos rather than convergence and stability.


It is clear that the German view – if it persists after Schäuble’s departure – maintains the strong line against any notion of debt-mutualisation and risk sharing at the ‘federal’ level.

The ‘non-paper’ is effectively a religious statement rather than having any coherence. It just asserts that things are fine, can be slightly improved with more surveillance, tighter rules and more structural policies (aka wage and pension cuts etc).

The inherent bias towards crisis will only be accelerated if Schäuble’s full suggestions are the way the European Commission moves.

Schäuble leaves a terrible record in my view although the media is holding him out to be a visionary.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

This Post Has 20 Comments

  1. If you want an economy to grow at – say 3% – and allow for inflation – say 2% – then surely you need a deficit each year of 5% to just stay the same? That’s assuming you don’t wvwn run an external deficit like many Southern European countries. Why is it so hard for people in Germany to understand this? Is it just their massive external surplus that shields them from most other countries reality of not running external surpluses?

  2. ‘ then surely you need a deficit each year of 5% to just stay the same”

    That mixes up stock and flows. The deficit is a residual based upon savings desires. You cannot target the residual. What you have to do is buy enough things to maintain the flow of spending sufficient to cause things to grow.

    The Germans don’t buy enough. Or rather the middle class Germans in charge buy enough, but nobody else has any money to do so. And it will probably require the election of another far-right team in Germany to change things. That seems to be how their culture works.

  3. Bill,

    Schauble is only one of many as the ECB has advisory boards most ( 507 out of517) of which populated by bank representatives no wonder these banks are too big/ powerful to be allowed to fail!

  4. In this passage, Schaeuble is self-contradictory.

    “More ambitious scenarios and plans for the ESM and its financial capacities, either regarding the possible role as an additional backstop for the controversial European Deposit Insurance Scheme, or regarding a brand new fiscal capacity as a transfer mechanism for the Eurozone would put much too great a strain on the ESM and go against its core purpose of bailing-out countries in severe trouble.”

    A fanatic would likely fail to notice such inherent incoherence. But this is how I have interpreted his position. Being German, one might have hoped that he might feel more reverence for Kant’s distinction between ends and means. But I see none. Schaeuble seems to be quite content to use human beings as means to some abstruse, seemingly impossible to achieve, end.

  5. Dear Bill

    The first and foremost requirement of a monetary union is that all members have the same inflation rate. If the members have different inflation rates, then those with the highest inflation will undergo a real up-valuation and lose competitiveness. What happened since the introduction of the euro is that Germany and the Netherlands have practiced excessive wage restraint and thereby kept their inflation too low relative to the other members of the Eurozone. The result has been that Germany and the Netherlands have maintained low unemployment by running big current-account surpluses, that is, by exporting unemployment to the other members of the Eurozone. Schäuble (and Jeroen Dijsselbloem) is oblivious to that.

    If Germany has had inflation of 1.2% during the last 20 years and France 2%, as was agreed on for the Eurozone, then the price level will be 15% higher in France than in Germany at the end of the 20 years. To reverse this, inflation will have to be higher in Germany than in France for a while. If you are behind, then you have to temporarily move faster than the the one ahead of you in order to catch up. As long as this doesn’t happen, France will be in the doldrums.

    Regards. James

  6. James, Schaeuble is not oblivious to the disparity you mention. He thinks that it is just fine.

    To require all members of a monetary union to have the same inflation rate, as it were, is to require the impossible. The US and Canada are such monetary unions, but the costs of living among the various states and provinces are quite different. Requiring Montana to have the same cost of living rates of increase as California is to demand the impossible. Neither Canada nor the US are perfect federal unions, but they are ones that work. Of course, it is desirable to remove, as much as possible, any disparities, but neither the EMU solution nor yours will work.

  7. Then Mark Eyskens, former Belgian minister who negotiated Maastricht and had a pr tour with Delors in 2000, said on Belgian tv last week that the SGP criteria of 60% debt/GDP had been decided in a time when interest rates were at 12% and the max 3% budget deficit rule actually was meant to limit investment (so not just automatic stabilizers).

    The damage it all caused and the human cost are enormous.

  8. I thought the US economy was bad.

    Europe is such a nightmare. You remind us that we have 21 percent unemployment in Greece and 17 percent in Spain.

    I got very unhappy when I graduated (even when I was studying actually) because I was not impressed with my own biochemistry degree and didn’t feel I was prepared for the job market. Thankfully, I have been one of the luckier dogs that got a bone.

    For young Europeans, I cannot begin to imagine their pain. Many of them are not going to be as lucky as me. It’s really sad to feel like a waste of space. Young people get employment and succeed because opportunities are given by older people. It’s not our fault we don’t have jobs. All this victim blaming can get into one’s head. As a young person, I ALWAYS feel like I could have worked longer or forced myself to learn something I hate just to make myself more employable.

    Many older people themselves are not making it themselves, so how can they give the next generation a chance?

    Had some shower thoughts last night, and I realized what we have now are grossly mismanaged high surplus societies in the West. A lot of this pain is result of stupidity and greed. It must have frustrated the MMTers for decades that all this human sufferings can be avoided if people in charge were not full of feces.

    The one thing that keeps the status quo going is the idea that everyone deserves what they have now. The elites who run the nation are simply unfit to manage the country.

    I learned a lot from this blog. I feel much more empowered from this than all my years in undergraduate studies. This is not to diss undergraduate studies though, they did open the door for me.

  9. Victim blaming is very toxic. The idea that unemployment, budget deficit, basically all the ills in society are caused by the unemployed is more damaging than lost economic output. We produce too much anyway – people don’t know what do with the money they have, polls show overwhelming support for shorter working times. Work, as an institution, is placed on a pedestal and worshiped like some sort of ancient pagan God. And of course mighty God demand sacrifices, people’s wellbeing being just one of them. Things won’t change because powers that be benefit from the situation – top 0,1% has a lot of power and lives by rent collection.

  10. It is easy to demonize Schauble. He is tough and uncompromising. However, he is committed to protecting the German people from the profilgate excesses of others in the EZ. It is (was) his political mandate. I think this is fair enough. The Germans do not owe any one else a living. The Germans are a diligent and innovative people. This is their competitive strength. If other nations want to join in a monetary union with them, then they have to be as good as the Germans. And of course, the poor economic performance of other EZ nations puts downward pressure on the Euro which enhances the international competitiveness of the German economy. Indigent southern European economies probably, on balance, play into German hands. Additionally, the bond markets continue to finance indigent economies allow them to continue their behaviour, until of course, things go awry and the markets have to be bailed out.

  11. Henry:

    What makes you think it’s been other countries desiring to be in a monetary union with Germany? An industrious and innovative people? Give over, you must think that we were all born last night.

  12. GrkStav,

    So which countries were compelled to join the EZ?

    “An industrious and innovative people?”

    Hardly disputable.

  13. GrkStav,

    And I am guessing here, “GrKStav” is something like “Greek Stavropoulos”? Maybe I am way off beam.

    If you are Greek I can understand why you say what you say.

    However, Varoufakis himself claimed that Schauble offered Greece the opportunity of a negotiated, orderly, funded exit from the EZ. Why didn’t Greece take it? And it is not Germany that is the source of Greece’s problems. The Greeks need to take responsibility for this. Of course, Schauble, along with the other finance ministers responsible for running the EZ, certainly did make it very tough for Greece.

  14. Schauble short-changed German workers, they got fraction of the purchasing power they send to foreigners. As Warren Mosler says, economy is the opposite of christmas, its better to receive than to give.


  15. Hepion,

    “And of course mighty God demand sacrifices, people’s wellbeing being just one of them. ”

    So true.

  16. It is easy to demonize Schauble.

    By his deeds you shall know him.

    He was Kohl’s bagman and lost the chancellorship he had worked for thanks to the black widow angela and her backers.

    He deserves demonisation far more than the lionisation his vapid fans have showered on him.

  17. So, Henry, when an elected government chooses to enter the EMU it’s all good, and a clear manifestation of the popular will. If, on the other hand, an elected government wishes to change the arrangements that previous elected governments accepted with their ‘alleged’ partners and fellow ‘union’ members, it’s ‘for the birds’ and ‘democracy’ and ‘elections’ cannot be allowed to alter agreements?

    And no, mate, I will dispute till my last breath this mythology about Germans being industrious and hardworking. It’s no more true and accurate, no less a misleading stereotype, than the opposite stereotypes whereby Germans USED to be characterized (as unreliable, swindling dilletantes, as lazy, safety-oriented, traditionalists, etc).

    Some of us have read about and are aware of the ‘realities’ and ‘perceptions’ of 19th century Germany and Germans. You all did not suddenly become “better people”. As for your post-WWII ‘economic miracle’, again, give it a rest. You all were offered a very sweet deal, and allowed to operate internally and in ‘Europe’ in ways forbidden to others, by the victors of WWII, for their own purposes and with an eye towards larger geo-strategic and geopolitical considerations. Your post-WWII governments have been “gaming” the system, whichever system existed at the time, with impunity and, admittedly, with aplomb and alacrity. The fact that you’ve had, have cultivated, and rewarded fifth phalanxes in the countries which your Third Reich decimated during WWII is a marvel, but it doesn’t make you good, honest, hardworking, industrious, innovative people who should be emulated.

  18. GrkStv,

    Why do you presume I am German?

    But I will let you in on a little secret (even though you won’t confirm or deny that you are Greek – not that that really matters). My surname is German, but both my parents are Italian. However, I was also born and bred in Australia. My German forebears settled in north eastern Italy over 500 years ago. So, I’ll let you decide whether I am German. And if you think I have any automatic/natural sympathies for the Germans, I will also let you know that my parents endured the German occupation during WWII – a time they will not/cannot forget.

    And as for changing rules, the EZ is like any other club, if you don’t like the rules, don’t join. If you are not going to abide by the rules, don’t join or get out. You can attempt to change the rules but if you can’t and you can’t tolerate the rules, get out.

    Schauble offered the Greeks a way out. They opted to stay with the EZ. The mess that Greece is in was caused by the Greeks. It is time for the Greeks to take responsibility for their predicament.

  19. Excellent bkog.

    @henry yes it is possible to demonise schauble because he has been responsibke for needless hardship.secondly the man is intellectually incongrous~ the ecb is flouting all
    Their own rules to maintain the euro!it is a complete circlejerk.

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