In the late 1990s when there was huge pressure on the UK to join the single currency, prominent Germans used to meet me to try to persuade me I was wrong in opposing the Euro.
One of the arguments I used to put to them was that a single currency needed a single country to back it. I was worried that not even the German people bought into the scheme. Around 70% of German electors wanted to keep the DM, their own successful post war currency.
The German establishment figures politely but firmly explained to me that the views of the German people as a whole did not matter. 70% of the German elite, the politicians, bankers, senior businessmen and leading academics wanted the Euro, so the Euro they would have.
They knew their country, and they were right. Germany went ahead with all the other states that wanted to join. They all overrode the very sensible rules over who could join. It was a political project. They would sort out all the economic differences over inflation, borrowing, growth rates and public budgets after they had all committed.
Today it looks as if my worries about the attitude of the German public could have more force. The German people are still not reconciled to their single currency with the neighbours. There is a strong groundswell of opinion in Germany against common Euro area borrowing, against any bail outs, and against Germany paying more by way of transfers to help the poorer parts of the Union. Most of the German elite still think they are right to keep the Euro, but an increasingly reluctant people is going to make it difficult to put in place the transfers needed to make it work. A successful single currency area requires people in the richer parts like Germany to send money to the poorer parts like Greece.
In the last fortnight Mrs Merkel has had to rule out German support for any common Euro area borrowing, the favoured solution by France, the UK and others to the Euro’s main problem of sovereign debts. The German President has argued that the bail outs so far agreed are probably illegal. An important court case is pending on this issue. Mrs Merkel is having to move back to a position of not supporting the rest of the Euro area, as the pressure mounts from her own party against the costs of Euro membership. The elected officials are beginning to reflect German popular doubts about the wisdom of Euro integration. It is true she is astute at cobbling together too little too late packages to get through the German Parliament. She may well do so again, with promises that the bail out fund at EU level will need Germany Parliamentary approval for new countries and for extra money. That simply gets the last agreement through – it does not tackle its obvious inadequacy.
Even Finland has added to the difficulty by refusing to put up her share of the Greek loan without full collateral, leading many Germans to say if one gets collateral they all need collateral. That would undermine the Greek loan, as Greece probably cannot find all the collateral that would be needed. If Greece does not get her loan soon state bills go unpaid and Greece ends up reneging on her debts. Work I read is now advanced on a compromise over this tricky issue.
Mrs Merkel probably hopes she can use strong language against more bail outs and borrowing to steer her through, whilst facilitating back door means of doing it through the European Central Bank. The show has been kept narrowly on the road in the dog days of August by the European central Bank buying the bonds of Spain and Italy so they can still afford to borrow in the market to pay their bills. This is meant to be a temporary measure, pending sorting out the problems of the big Euro bail out fund. No-one in the markets thinks they can agree a fund big enough to meet the needs of Spain and Italy.
The truth is a very political project, the Euro, is running into serious political danger. If Mrs Merkel is unable to move her voters and her party to agree to major financial support for other Euroland countries when they need it, the markets will push and push for the removal of weaker countries from the Euro by undermining the sovereign debts of the weaker countries.
I have always argued that because it is a political project the growing economic stresses and costs did not mean it was about the end. It is a different matter, however, if the political stresses for Germany become too great. The German people could at last have their views taken into account, after a couple of decades of being ignored on this central issue. I have no doubt the German government -and the other political elites around Euroland – will do their best to find ways to repress the public’s wishes or to find a less provocative way of lending and giving money around the union to keep it going. However, these are dangerous times for EU governments, and the German people now have a chance to be heard.
Meanwhile, the European Central Bank has added £43 billion to its bond portfolio to prop up Italian and Spanish debt. Given that Italy has only raised E7.74 billion new debt at its last auction, this so far is an expensive way of borrowing on the cheap.