It’s eerie, and perhaps a subconscious admission, to hear Angela Merel, Europe’s most powerful leader, repeat an expression integral to the spectacular backfire of Greece’s bailout negotiations last year. From the Financial Times:
German chancellor Angela Merkel said she had no “Plan B” for solving the refugee crisis, and insisted there was nothing that would make her change course — despite growing popular anger in Germany at her government’s handling of the issue.
Speaking on a talkshow on Germany’s ARD TV channel, Ms Merkel said she could “understand” a recent poll which showed 81 per cent believed her government had lost control of the migrant crisis. But she rejected the proposal backed by many in Germany to introduce an upper limit on migration. There was no point, she said, in making a promise she couldn’t keep.
“I have no plan B,” she said. “There’s no sense in working on two [plans] at the same time.”
In the case of Greece, the “no Plan B” was Greece’s posture that it would not leave the Eurozone. Even now, it’s not clear how Syriza arrived at that position, which we think was substantively correct but was probably unwise to announce, since it amounted to throwing away a bargaining chip. Syriza had campaigned on getting relief from austerity while staying in the Eurozone, and polls (until very recently) have shown majorities in favor of staying with the common currency. So Syriza may have felt its hands were tied. Moreover, Varoufakis himself had argued, forcefully, in 2012 that it would be disastrous for Greece to leave the Eurozone and analogies to Argentina’s ending its dollar currency peg were misguided. It does not appear that anyone took a serious look at the issues that we believe make it impossible to go back to a separate currency absent years of preparation, which are the banking information technology issues, which entails the cooperation of a horde of parties outside the Greek government’s control, as well as a daunting task at the individual bank level.
Now it turns out that Varoufakis and a small team did look a bit at the “leave the Eurozone” option, but it was so late in the game and cursory as to be tantamount to “no Plan B.”
Having said all of that, the Greek side badly overestimated its bargaining power, and its intransigence in the negotiations led to increased anger on the creditor side, with even its initial ally, France, becoming alienated. The result was a more punitive deal than was on offer when Syriza took power.
So with this sorry history, one wonders how Merkel revealingly used the same expression for her embattled position. Is her subconscious telling her that she will wind up suffering a similar catastrophic loss?
Merkel is at risk of being undone by political rigidities and prejudices….the same factors that did in Greece’s bid for economic relief. Varoufakis and James Galbraith had a creative plan, The Modest Proposal, that in theory would have gone a long way to rescuing the Eurozone project. One of its key mechanisms was providing for large-scale transfers to periphery countries by using the European Investment Bank to engage in infrastructure spending, with that financing coming from bond issues guaranteed by the ECB. Mind you, Germany had already nixed the idea of Eurobonds, and this looked too much like the same idea under a different name. But equally large obstacles were the supplicant Greece taking the position that it could reform Europe for its own benefit, the prejudices that the Germany government and media had stoked against Greece, and the creditor countries’ rigid adherence to the idea that debts must be repaid, even when it’s abundantly clear that they can’t and won’t be.
Here, Merkel is holding fast to what appears to be an uncharacteristic posture: holding out for what she deems to be good for Europe, when it may not be good for Germany. She has tried to take moves where she could claim both sets of interests, Europe’s and Germany’s,were being advanced. But on Eurozone banking and finance matters, it is clear that the currency union is being run as a Great German Co-Prosperity Sphere. We’ve discussed recent example of appalling short-sightedness: how Germany is refusing to move to a Eurozone-wide deposit insurance/bank resolution regime, and changes in the treatment of bank holding of sovereign debt which in combination with a half-baked sovereign insolvency mechanism, look like a prescription for bank runs and sovereign credit crises.
In other words, on the financial front, Germany is blatantly favoring its own interest in the management of the Eurozone, to the degree that it is casually implementing destructive policies that will blow back in a nasty way.
Could Merkel’s pr-immigrant policies actually be pro-Germany, as opposed to pro-EU, in a way that she is unable or finds it politically too risky to articulate? She appears to be reflexively supporting the Schengen system of open borders and free movement. Is her diehard support really about trade? Running big surpluses has become central to Germany’s economic model. Controlled borders would undermine that. To what degree is an open question.
But this observation in a column today by Wolfgang Munchau may be key to Merkel’s stance:
Member states have lost the will to find joint solutions for problems that they could solve at the level of the EU but not on their own. The EU’s population of more than 500m can easily absorb 1m refugees a year. No member state can do this alone, even Germany.
And unlike the ever-festering Eurozone banking/sovereign debt crisis, where the Eurocrats have become complacent about the underlying risk due to their success in keeping “kick the can down the road” going, Merkel likely sees thatBrexit risk is real, and beyond her power to finesse. Hence she is pushed into trying to find real solutions. Again from Munchau:
Refugees now find themselves trapped in Greece. Some may leave for Italy by boat. When those who survive the journey arrive there, I would expect Slovenia, Switzerland and France to close their borders. At that point, we should no longer assume that the European Council of heads of government is a functioning political body.
A refugee crisis that spins out of control could tilt the vote in the British referendum. There is no way the EU will be able to deal with two simultaneous shocks of such size. Coming at a time like this, Brexit has the potential to destroy the EU.
Munchau makes clear that he does not expect a worst-case outcome. But he also contends that Merkel has badly botched the situation by overplaying her hand. While Germany can get away with that against weak and desperate creditors, and has blinded itself to the dangers of toying casually with the Italian banking system, this is a front burner issue with citizens all across the Eurozone, and there’s no behind the scenes power like the ECB that can alleviate pressure. Munchau again:
Ms Merkel must take much of the blame. Her open-door policy was anti-European in that she unilaterally imposed it on her own country and on the rest of Europe. She consulted only Austrian chancellor Werner Faymann.
And as the original story makes clear, Merkel and Austria are now at loggerheads:
Austria has in recent days joined nine neighbouring states in imposing border controls, in a move that put in doubt the future of the Schengen passport-free travel zone and raised fears that tens of thousands of refugees will be bottled up in Greece. Athens recalled its ambassador to Vienna in protest at the move.
Ms Merkel criticised the Austrian action, saying Greece had been let down. “We didn’t keep Greece in the euro in order to leave it in the lurch like that,” she said. “That is not my Europe.”
Merkel is right that it is untenable to turn Greece into an open-air prison camp, which is what many European countries appear to think is a solution. Despite complaints about Greece’s failure to “control its borders,” pray tell how Greece is to do that. Build a wall around its very long coastline? And help promised by the EU for limiting entry has not been forthcoming.
But another unintended truth may loom in Merkel’s remarks. It may indeed not be her Europe for all that much longer. Like the less-seasoned Varoufakis, she may have alienated so many key parties that a deal that might have been possible is now beyond her reach.