The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (46 page)

On the periphery, even bankers who say they have been on the receiving end of Germany’s arbitrary economic justice hold their hands up. A former Cypriot finance minister told me in the middle of that nation’s crisis: ‘In a strange way the German hegemony, the total power of the Germans, irrespective of if you agree or disagree, is a more effective way of governing the euroblock. You have leadership and direction.’

Merkel’s advisers echo this: ‘Do not underestimate people in the crisis nations saying to us, “Please use the leverage that you have to change our countries.”’

A more reasonable question concerns the broader social impact of the Hartz IV reforms on Germany itself. The impact on the unemployment numbers was miraculous. But Chancellor Merkel does not need to stroll far from the Bundeskanzleramt to see the highest levels of unemployment in Germany. The reforms pushed down wages for poorer Germans. Between 1997 and 2010, 5 million Germans were pushed out of its middle classes. The MiniJobs and ‘one-euro’ jobs created by the Hartz reforms were providing an escalator down rather than up for large swathes of German citizens. Social mobility was declining. Official measures of poverty reached all-time highs, with one in six Germans now beneath the poverty line. More than one in three children in Berlin relied on a Hartz IV payment. The German dream of ‘prosperity for all’ is fractured, even if there are plenty of jobs. Hartz IV recipients were becoming ghettoised. It’s easy to see why southern Europe may not volunteer for a German blueprint that amounts to ‘Get Paid Less’.

Hartz himself told me: ‘The reforms needn’t necessarily be accompanied by wage reductions.’ Does he accept that some of the Hartz reforms have led to more poverty, less social mobility, and declining living standards? ‘Absolutely not. The reforms opened up prospects for all so that no one should arrive at a dead-end situation. The long-term unemployed missed out when the reforms were actually implemented… Not everything labelled “Hartz” is actually “Hartz”.’

Back at the Oktoberfest in Munich, Franz Kollman, a 72-year-old Bavarian, runs the dodgem ride, which he has named ‘Euroskooter’. EU flags hang off every car, and there’s even a plastic fresco of the Parthenon. ‘I’m still a big fan of the euro,’ he tells me as he dispenses plastic euros to the revellers to operate his ride. ‘If one country backs another, in the end everything will work out.’ In Berlin, however, a fundamental intellectual debate was emerging, sometimes between the finance ministry and the Chancellery. In the early summer of 2012 this debate centred on Greece. Was Greece domino or ballast? Would the fall of Greece from the Eurozone set off an uncontrollable domino effect in Spain, Italy and elsewhere? Or was Greece the ballast that needed to be ejected to steady the Eurozone ship? German finance minister Wolfgang Schäuble was at this moment a believer in the ballast theory. But he was not calling all the shots.

For now the German economy is still creating enough jobs and wealth for Germany to fall back on its traditional role of fostering solidarity across the European Union although that solidarity comes with strings attached. But with a new downturn, that collegiate spirit will be tested as much in Berlin as it has been in Athens, Dublin, Madrid, Lisbon and Nicosia. A backdoor solution to this conundrum lay on a patch of German territory that was becoming progressively less Germanic: Frankfurt.

Dramatis personae

Wim Duisenberg, first president of the European Central Bank (ECB) (1998
–2003)

Jean-Claude Trichet, ECB president (2003
–11)

Silvio Berlusconi, Italian prime minister, periodically

Mario Draghi, ECB president (2011
–)

Brian Lenihan, Jnr, Irish finance minister (2008
–11)

Patrick Honohan, governor of the Central Bank of Ireland (2009
–)

Axel Weber, Deutsche Bundesbank president (2004
–11)

Jens Weidmann, Deutsche Bundesbank president (2011
–)

Lee Buchheit, sovereign debt restructuring lawyer

On the thirty-fifth floor of the Eurotower, the 1970s HQ of the European Central Bank in Frankfurt, a member of Mario Draghi’s team looked out towards the River Main docks. The construction of the ECB’s new headquarters building had already begun: two slender towers in the shape of giant wedges linked by a gleaming glass atrium. ‘When we move there, not only will the euro still exist, but there will be more than seventeen members,’ he tells a guest sceptical of the euro’s future. The words were carefully chosen. ‘More than seventeen’ still holds out the possibility of a shuffling of the membership pack. Perhaps a Latvia could be substituted for a Cyprus, for example. But the words were conveying an unusual confidence at that time in late 2011, a time when the whole euro project seemed to be falling apart. It was an early window into what in the Eurotower became known as ‘conditional irreversibility’. This unspoken Draghi doctrine is designed to stop the markets betting on the Eurozone’s collapse, while reassuring donor nations, such as Germany, that strings are attached to the rescues designed to keep crisis nations in the euro.

It sounds contradictory. The motivation to save the euro obviously went beyond a simple desire to move into a state-of-the-art HQ. Most central banks have steel-reinforced bomb-proof vaults in their basements. In those vaults are piles of gold bullion and ancient sovereigns, and probably secret underground tunnels. The Bank of Spain has Royal Steps and a room full of priceless Goyas. Not so the basement of the ECB’s current HQ in Frankfurt. Its basement instead contains a bar-cum-nightclub called Living, which blasts out the German equivalent of Chas ’n’ Dave, interspersed with the odd tune from Right Said Fred. In 2002, on the evening of the launch of the first euro notes and coins, Living’s standards, at least musically, seemed rather low. By 2012, Living had begun advertising the fact that punters could eat a €12 steak lunch ‘at the ECB’.

Back at the start of the euro’s physical existence, the launch of the new currency on 1 January 2002 was generally regarded as a triumph. In a spectacularly choreographed operation, the new notes and coins came into circulation simultaneously across a great swathe of the planet, from the Aegean to the Caribbean, appearing in all twelve Eurozone countries and their overseas territories in the course of a single night. The Banque de France had insisted on three small boxed dots on the corner of the map on banknotes, to represent its Caribbean territories. Cyprus, not in the EU at the time, was not even on the map. To avoid arguments over which national landmarks would feature on the banknotes, they instead featured stylised bridges that did not actually exist (although later these fantasy bridges were actually constructed by an obsessive Dutch fan of the single currency). Crucially, on its launch, the new currency worked without any hitches – apart from a hike in inflation caused by a tendency to round up exchange rates.

At the Eurotower they noticed the tendency of euronotes to ‘migrate’ south from Germany and Holland as north Europeans went on holiday. No longer would marks and guilders swapped for holiday pesetas and lire need to be sent back by the truckload. So great was the influx of northern euros that Spain, for example, had to print far fewer notes – it could simply recirculate migrating euros. In January 2013 the value of euros in circulation topped €900 billion. In 2006 the euro had already overtaken the dollar as the most circulated physical currency. Up to a quarter is circulated outside the Eurozone, most in tracked truckloads provided by commercial banks to their correspondent banks from Britain to Bulgaria. The demand for physical euros is seasonal: a large spike before Christmas, and a smaller one before the summer holidays. But there is a long-term upward trend. The impact of financial panics is clearly discernible. There have been local spikes in Greece and Cyprus, as described in Chapters 1 and 13 (see
here
and
here
). In October 2008, just after Lehman Brothers collapsed, an extra €43 billion worth of euro banknotes appeared, and the entire circulation of the currency increased by an unheard of 6 per cent in just one month. The bulk of it comprised a 48 million (11 per cent) increase in the number of €500 notes, and these have remained in circulation to this day. As described in Chapter 1, it was a demand serviced by printing presses in Germany, Austria or Luxembourg. Only those nations had the plates for the world’s most valuable banknote. Basically, this was caused by numerous Germans who, fearing the imminent collapse of global capitalism, marched on their banks. The notes were heading for safety deposit boxes and people’s mattresses. In an era of ultra-low interest rates, where the opportunity cost of not putting money in a bank is tiny, one’s mattress seems as good a place as any to stow one’s savings. And under the mattress is where these bundles of the world’s highest denomination banknote have remained.

In its other great task, monetary policy, the infant ECB was finding its feet. Its inaugural president, the Dutch economist and politician Wim Duisenberg, was rapidly christened ‘Dim Wim’ for a series of blunders. Officials would tell me, constantly, that central banking was about credibility, and while the Bank of England had had over three centuries to build it, the ECB had been in existence for just three years. Central bankers at the time were following the fashion for inflation-fighting credibility through strict independence from powerful finance ministers and other politicians. It was a script pioneered across town from the Eurotower, at the Bundesbank, and at that time this image of independence was also being developed by the Bank of England. The ECB was routinely under pressure to protect its independence from comments by the French, and then from the then German finance minister, Oskar Lafontaine.

Just a decade on, that challenge to the ECB’s independence has been totally turned on its head. Now it was a question as to whether Europe’s puny politicians were sufficiently credible to stand up to an all-conquering European Central Bank. The worm had turned. The ECB had become the second most powerful economic institution on the planet (after the Federal Reserve) – or even, given its tacit political role, arguably
the
most powerful. And in a Europe dragging its feet over implementing the changes needed to end a damaging crisis, the ECB held all the cards. The ECB governing council could and did decide to pull the plug on the banking systems of smaller nations. Its president would pen stern letters to elected G7 leaders, demanding dozens of reforms. And the ECB had the power to take on – and beat – the bond vigilantes betting on euro collapse.

‘I watch pizzas,’ says a senior Eurozone official. Perhaps this unusual interest stemmed from the inflation-wary German tabloid that greeted Mario Draghi’s ECB appointment with the headline, ‘Mamma mia, for Italians, inflation is a way of life, like pasta and sauce.’

The official’s interest was tightly focused on the price of a freshly made 30-cm margherita in an ordinary restaurant. ‘In Sicily, it is €12 or more,’ he says. ‘Here in Germany, more like €6. In some parts of Frankfurt near the ECB, maybe even less than €5. And the quality is high.’ (My own unscientific online check of pizzeria menus in Frankfurt and Palermo did indeed yield prices around €4.50 versus €11.50.) The pizza was a product requiring the same flour, tomato and mozzarella, the same energy, and comparable minutes of labour throughout the continent.

The pizza test provided an intriguing lens on the incoherence of the Eurozone. There’s no reason why pizza, or beer, or haircut prices should be exactly the same even within a country, let alone within a single currency zone. But in theory, after a decade of monetary union, the prices should have converged as the constituent economies of the Eurozone converged. Why were the costs so different? In the Eurozone, German food prices had fallen a little, and Italian prices had risen. On top of that, restaurant prices in Italy are higher than in Germany. To the man from the ECB, the high cost of a pizza in Italy illustrated the price to punters of high labour costs and an uncompetitive market. Cars and TVs were converging in price, as imports, and larger goods were produced and traded cross-continentally. The price of pizza was part of a wider puzzle of a Eurozone that had diverged rather than converged, a Eurozone in which existing imbalances had not rebalanced but become even more unbalanced. The ECB’s big answer to this crisis was to force national economies back into line. But first they had to buy some time.

On the floor above Draghi’s office, on the thirty-sixth storey of the Eurotower, is the meeting room of the ECB governing council. This is the control room of the Eurozone. Against a panorama of skyscrapers cradling the River Main (a view sometimes dubbed ‘Main-hattan’), the room is dominated by a doughnut-shaped wooden table. Two large projector screens and two plasma screens display presentations from ECB staff. A Reuters terminal with currency charts is immediately behind the president’s chair. It is here, most crucially, that twenty-three men (and in 2013 it
was
all men) squeeze around the table to make the decisions on Eurozone interest rates, bond purchases and emergency bank funding. Twice a month on a Thursday, seventeen governors of the national central banks of each euro nation, and six executive board members led by Mr Draghi, hold a ponderous monetary seance. Intriguingly, the ex-Bundesbank president, Hans Tietmeyer, suggested the council sit in alphabetical order, not by nation but by surname. Perhaps he did not like sitting next to the Greeks, whose euro membership he had advised against.

The governing council members have to make decisions based on the entire currency area, not the vested interest of the nation-state they happen to come from. This room is the very place where old Europe traded sovereignty for its new currency. The twenty-three men who sit at this table check in their national baggage at the door, becoming post-national Europeans as soon as they enter the room. Minutes of their meetings are not due to be published for three decades, unlike the five years for the US Federal Reserve and two weeks for the Bank of England. This is supposed to help the council act in comparative secrecy without ‘national’ pressure over decisions and votes. So the council meeting room can be seen as the high temple of Europeanism. Recently, the quarrelsome German central bankers, with names like Weber, Weidmann and Welteke, tended to be alphabetically positioned almost next to the ECB president. On the presidential desk was Mr Draghi’s golden chairman’s bell. As the reluctant Bundesbank representatives around the table grew increasingly wary of the ECB’s crisis interventions, bringing order to these secretive meetings may have required more than a spot of campanology from Mr Draghi and his predecessor, Jean-Claude Trichet.