2 Views of Angela Merkel’s Legacy: Stoic Leadership, and Economic Malpractice

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Chancellor Angela Merkel of Germany oversaw Europe’s most powerful country during the worst financial crisis since the Great Depression, then the European debt crisis, and then the surge of immigrants from some of the poorest, most troubled nations on earth.CreditCreditTobias Schwarz/Agence France-Presse — Getty Images
Nov. 1, 2018

LONDON — In the political obituaries chronicling the departure of Chancellor Angela Merkel of Germany, the world is preparing to lose a rare source of sober-minded leadership at a time rife with dangerous tumult.

For the European Union, the loss appears grave. The bloc is contending with a nasty divorce with Britain, rising authoritarianism from Hungary and Poland, and a showdown with a populist government in Italy. Ms. Merkel’s pending retirement will remove a stalwart champion for the union’s cohesion. So say countless pundits and editorials.

But many economists take a less generous view of the German chancellor’s place in modern European history. Far from a hero who anchored the bloc under profound challenges, she played a leading role in amplifying an economic crisis, allowing it to erupt into an existential threat to the European Union and its shared euro currency. The resulting distress has undermined faith in the European bloc while fueling anti-establishment grievances across the Continent.

Like many national leaders, Ms. Merkel, time and again, catered to domestic political interests at the expense of broader European concerns, dismissing calls that Germany’s prodigious savings be put on the line to rescue debt-saturated members of the bloc. She impeded measures aimed at coordinating banking rules and public spending across national boundaries.

She adamantly opposed debt forgiveness to Greece, even as it teetered toward insolvency, and even as joblessness exceeded 27 percent — a special source of outrage given that German banks were primary lenders in Greece’s catastrophic explosion of borrowing.

“She was at the heart of the design of the flawed Greek program, which not only imposed austerity, but most importantly resisted restructuring the debt in order to save the German and French banks,” said Joseph E. Stiglitz, a Nobel laureate economist at Columbia University in New York. “The rhetoric that she used suggested that the crisis was caused by irresponsible behavior by Greece, rather than irresponsibility on the part of the lender.”

In place of public spending to soften the edges of the crisis, Ms. Merkel used Germany’s power as the largest economy in Europe to force troubled governments to slash support for pensions, health care and education. In the process, the moves helped lengthen and deepen a devastating economic downturn.

“This is what history will remember, a complete mismanagement,” said Amandine Crespy, a political scientist at the Institute for European Studies at the Free University of Brussels. “Austerity very clearly has deepened or even created this great gap, political fragmentation between the north and the south, between the debtors and the creditor countries that is very, very difficult to fix, and has had dramatic political consequences in terms of fueling the populist forces.”

Sifting through history is a complex exercise open to divergent interpretations. One can never know how events might have transpired absent some variable. Anyone in Ms. Merkel’s position would have found the going difficult. She oversaw Europe’s most powerful country during the worst financial crisis since the Great Depression, then the European debt crisis, and then the surge of immigrants from some of the poorest, most troubled nations on earth.

Some argue that no German chancellor could have held on to the office while behaving much differently in the realm of economic policy. Given a deep cultural proclivity toward thrift, moral revulsion over debt and a fear of rising prices dating to the hyperinflation after World War I, Germans were aghast at any arrangement in which their savings were on the hook for the recklessness of Greeks and Italians.

“She had to sell German voters on the idea that Germany would send resources to bail out European countries that were already engaged in irresponsible policies,” said Nicola Borri, a finance professor at Luiss, a university in Rome. “That was the problem. Politically, it’s really hard to criticize Merkel.”

In Mr. Borri’s view, Italy and other nations on Europe’s southern periphery did receive a significant infusion of wealth from the north when the euro was created nearly two decades ago. Investors began lending money to Italy, Spain, Greece, Portugal at rates that were practically the same as those in Germany, no longer demanding a premium for extra risk. Here was a choice dividend from sharing a currency with Germany and its rock-solid credit.

“These are de facto transfers from rich to poor countries,” Mr. Borri said. “Rather than use this money to reform their economies, these countries increased their spending.”

But other economists say Ms. Merkel squandered an opportunity to use the crisis as a teachable moment that could have altered German public opinion. She might have fostered a sense of responsibility in Germany to see the nation as a primary beneficiary of the European Union, with the responsibility to aid those in distress.

Instead, she catered to stereotypes of lazy Greeks, at one point suggesting they take too much vacation. She used their troubles to inaccurately depict the breadth of the crisis. Though Greece’s government had been profligate, those in Ireland and Spain had enjoyed budget surpluses before they landed in crisis, falling into perilous debts only after bailing out banks.

Europe’s economic troubles have frequently centered on a dearth of faith in the endurance of the euro, the currency shared by 19 members of the bloc. Since the euro’s inception, critics have warned that it is structurally unsound — a currency union lacking an accompanying political apparatus to coordinate policy and collective aid when trouble emerges.

Under the guidance of Ms. Merkel and her famously unsentimental finance minister Wolfgang Schauble, Germany effectively used the crisis as an elaborate demonstration of the euro’s foundational defects. As they bickered with European counterparts over the principles that should apply to the Greek rescue, they delayed help and exposed global markets to the possibility that none might be forthcoming. A currency championed as a source of European solidarity was exposed as an impetus for discord.

As the crisis mounted in the early part of this decade, reformists called for collective action. Europe needed rules governing all of its banks along with insurance for depositors to lift confidence in the financial system. The worst-hit countries needed relief from European rules limiting deficit spending.

Ms. Merkel and Mr. Schauble maintained a hard line aimed at protecting German taxpayers from having to pay for the supposed sins of profligate spenders in sunnier climes. In tones of moral admonishment, they prescribed structural adjustment — rules making it easier to fire workers — along with more cuts to public budgets.

“There is no crisis of the euro itself,” Ms. Merkel declared in a 2012 speech delivered at the World Economic Forum in Davos, Switzerland. “There is a debt crisis. We have to ensure that stability and sound public finances are the order of the day. Indebtedness is the biggest danger and the greatest risk to prosperity on this continent.”

Eventually, Europe forged a partial banking union that put in place bloc-wide rules, while allowing crisis-hit countries some flexibility from limits on deficit spending. The European Central Bank resorted to extraordinary measures — though far later than its American and British counterparts — extinguishing the worst fears of the euro’s potential demise. A series of rescues kept Greece solvent, even as many doubt the country will be able to pay back its crushing debts.

But these measures happened with Ms. Merkel’s reluctant assent. The delays and dysfunction that played out publicly along the way instilled no confidence in the sanctity of the euro or the solidarity of Europe’s leaders.

“The euro crisis started getting better the moment Europe decided to go against what Merkel said the policies should be,” said Christian Odendahl, Berlin-based chief economist at the Centre for European Reform, a research institution. “The euro crisis got better not because of, but despite Merkel.”

Ultimately, Ms. Merkel fueled the notion that Europe’s crisis was a morality play in which prudent nations in the north would school their reckless counterparts in the south on the virtues of living within their means.

Such depictions seem likely to outlast Ms. Merkel herself, making it difficult to imagine Europe summoning the unity to bolster itself against the next crisis.

“She helped shape the mind-set of the Germans,” said Mr. Stiglitz, the Nobel-laureate economist. “She shifted it in a very ugly way, and that makes it very difficult to change the framework of the eurozone. She could have reframed it. That would have been leadership.”

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