INTERNATIONAL QUARTERLY EDITION · Quarterly_2-2013_komplett.qxd 04.09.2013 08:58 Seite 3 [Limberg...

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NWolfgang MerkelDemocracy and European Integration:a »Trade-off«?A conversation with Martin Schulz»Europe has to defend its solidarity-based modelof society, even in the age of globalization«Günter VerheugenWhat Kind of Europe Do We Want?Peer SteinbrückBanks Must be Allowed to Fail.A New Bid to Restore Confidence

2 2013Journal of Social Democracy€ 3,80

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1 Editorial

Wolfgang Merkel2 Democracy and European Integration:

a »Trade-off«?

A conversation with Martin Schulz7 »Europe has to defend its solidarity-based model

of society, even in the age of globalization«

Almut Möller12 The End of the EU as We Know It

Günter Verheugen16 What Kind of Europe Do We Want?

Hanjo Kesting20 The Life of the Mind in Europe

Peer Steinbrück25 Banks Must be Allowed to Fail.

A New Bid to Restore Confidence

Gustav A. Horn30 How to Achieve Effective Oversight

of the Financial Markets

C O N T E N T S



E D I T O R I A L

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Because its model of social organization is based on solida-rity, the European Union views itself as a social demo-

cracy. As such it aspires to set an example for the rest of theworld. Europe differs essentially from libertarian democra-cies such as the United States in recognizing the basic socialand economic rights of all its citizens beyond the civic andpolitical rights enjoyed by the inhabitants of any law-governeddemocracy. The expectation that the EU would treat thosesocial and economic rights as obligatory norms for all themember nations – as well as the Union as a whole – finds expression in one ofthe Union’s foundational agreements, the Lisbon Treaty of 2007. The EU hasfailed to move forward toward complete fulfillment of that promise in a way con-sistent with its own self-imposed obligations and the needs of European citizens.Indeed, the financial crisis that began in 2008 and continues essentially un-resolved to this very day, has actually reduced the level of social democracy thathad previously been attained. Social services and social insurance have been cutback in almost all the member countries. In the hardest-hit »crisis countries« inthe Mediterranean basin, the cuts have been so drastic that they clearly weakenthose nations’ claim to be social democracies at all. The social dimension of theEuropean Union has always played second fiddle to the power of its internalmarket, but now those social commitments seem headed for oblivion. What ismore, the sovereign debt that governments have been forced to incur in the wakeof the financial markets’ dysfunctionality has left little money available for ne-cessary investments in education and other fundamental social systems, bothnow and far into the future.The direct consequences of the crisis are clear enough:European citizens are now fed up with the lack of progress in resolving the crisis.

In this issue our authors address many of the topics connected to the crisisand the damage it has inflicted on social democracy in Europe. Some of the cru-cial issues discussed in these pages include: how the socially-minded, solidarity-based Europe can regain lost ground, and how democracy, certainly one of its pre-requisites, can again be put on a solid footing.What sort of a Europe do we want,and what roles should be assigned to banks and to the democratically legitimatedpolitical sphere, respectively? And how can one impose durable, effective regula-tions on the financial markets when some of the political decision-making cen-ters do not want to go along, at least for the time being.At first glance, this debatelooks Eurocentric. But in truth its conceptual and practical outcomes will havebroad implications for the way in which a crucial issue is handled: the intersectionbetween the political sphere, which of course relies on democratic legitimacy,and the banking sector – indeed global financial markets as a whole.

Thomas MeyerEditor-in-Chief and Co-Publisher



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The second rescue package for Greeceturned into waste paper even more

quickly than many feared. The requisite»modification« passed the Bundestag atthe end of November, 2012 with unseemlyhaste and apparently irresistible necessity.All the talk was about solidarity withGreece ...with Greece? With citizens whostand to lose their jobs, their houses, andtheir incomes because of austerity policiesforced on them by outsiders? Or was itsupposed to be solidarity with the ship-builders, entrepreneurs, lawyers, and in-vestment advisors, who have long foundways to avoid paying their fair share of taxesin this »failing tax state?« Someone shouldalso have mentioned that the lion’s share ofthe credits »for Greece« would actually beflowing back into the big banks of Franceand Germany. This is not simply a matterof »solidarity« offered by rich countries topoor ones. It is also a kind of perpetualhostage-taking inflicted on democraticpolitical institutions by speculators work-ing in deregulated financial markets.

Crises call for specific political re-sponses. They put pressure on governmentto take action. Decisions have to be madequickly. The elements of deliberation suchas one finds, ideally at least, in politicaldiscourse and parliamentary negotiations,start to look like a democratic luxury. Cri-sis situations in politics demand rapid,simplified decision-making procedures.

The dividing line between executive andlegislative branches gets blurred. As thewell-known Weimar-era expert on publiclaw,Carl Schmitt,observed – evidently withsome relief –, crises are the »hour of theexecutive.« That is not to imply that thepresent German government is followingthe script penned by this conservative the-orist of sovereignty, or is even aware of it.Nevertheless, we can discern exactly thatmodel of politics lurking behind the Euro-pean policy currently being pursued byliberal-conservative coalitions in Europe,most certainly by the one in Germany. Po-litical power is drifting toward the exec-utive, even though the shift does nothingto resolve the crisis.Yet it is something thatmay cause long-term damage. The pointis not to serve up yet another pointlesslament about the democratic deficit in theEuropean Union. There is more at stakehere, specifically a shift of the axes of le-gitimacy between democracy and tech-nocracy, legislative and executive, nation-state and EU.

We are currently witnessing a powersurge in European institutions: the Coun-cil, the Commission, and the EuropeanCentral Bank (ECB). Such a transfer ofpower away from institutions with demo-cratic legitimacy such as parliaments andelected governments toward the poorlysupervised ECB with its shaky claim tolegitimacy is generally justified by appeal-ing to economic imperatives. Attacks byoligopolistic hedge funds, insurance con-sortia, investment banks, and other specu-lators (misleadingly dubbed »the financialmarkets«) caused interest rates on the cre-dits granted to vulnerable debtor nationsto reach alarming levels. The GermanChancellor’s dithering gave the specula-tors a boost, driving interest rates as well

Wolfgang Merkel

(*1952) is Director of the »Democracy andDemocratization« department at Berlin’s

Science Center for Social Research andProfessor of Political Science at the Institute

for Social Science at Humboldt Universityof Berlin.

[email protected]

Wolfgang Merkel

Democracy and European Integration:a »Trade-off«?



as debt levels toward the stratosphere.Only wide-ranging guarantees issued bythe ECB, or so it is claimed, were able tostop this ominous wave of speculation,thereby allowing the affected countriesonce again to get credit at interest ratesthey could afford to pay. Thus the ECBallegedly needs to retain its capacity forrapid and discrete – and therefore opaque– reaction. This line of reasoning looksconvincing in an economic sense, but notin terms of the theory of democracy.

Trade-off I:Democracy vs. Technocracy

In keeping with democratic principles,every power surge in the ECB shouldbe accompanied by a reinforcement ofdemocratic control procedures over it andopportunities for public participation inits decisions. There is no interpretativewiggle room here. A »democracy problem«of this kind was already apparent in thecase of the German Bundesbank, and iseven more pronounced now with the ECB.The increasing power of the ECB duringthe euro-crisis has been accompanied by adecline in the power of national parlia-ments and even governments. This is trueof both creditor and debtor nations. TheECB has used monetary policy, chieflybond purchases, the European StabilityMechanism (ESM), and loans tied to aus-terity conditions, to intervene deeply inthe budgetary policies of EU memberstates. It has extended its influence overmember state policy-making not onlythrough its own actions but also via thecooperation of the European Commissionand the International Monetary Fund(IMF). None of these institutions is espe-cially noteworthy for its democratic sensi-tivities, nor is any of them accountable tothe people through democratic institu-tional channels. They owe their legitimacyinstead to their expertise and their pre-

sumed problem-solving capabilities (whichare at times frivolously attributed to them).Technocracy substitutes for the demo-cratic mandate.

The right to craft a budget, the mostcherished of all parliamentary preroga-tives, is being hollowed out. This is trueeven of the »creditor nations« such as Ger-many, in which the Parliaments has ratifiedthe crisis policies of Angela Merkel ex postfacto (to which there are allegedly no alter-natives) rather than discussing them exante. The debtor countries, with Greeceas the prime example, have to accept thehumiliation of being treated as immaturewards, incapable of democratic self-deter-mination. Since all of the guarantees andloans are doled out only if the PIGS coun-tries, as they are sarcastically called (Por-tugal, Ireland, Greece, Spain), accept a»made in Germany« debt brake, they willbe in thrall for many years to come tointernational financial institutions withno democratic legitimacy. It doesn’t takemuch imagination to paint a picture of therestrictive impact that these conditionswill have on departments that spend a lotof money, such as those in charge of socialand educational policies. In all four coun-tries the social dislocations arising fromexternally imposed deflation can alreadybe identified. These measures thus violatenot only the foundational principles ofdemocracy; they also drain resources awayfrom core areas of social justice policy.Post-democracy has arrived in Europe’sSouth. Democratic institutions such aselections, parliaments, and governmentsare declining into mere facades, while thetroika (see above) makes the real politicaldecisions.

Of course it could be argued that thefading-away of democracy just has tobe accepted on account of the economic»emergency,« although that emergencyis really self-inflicted, since it has arisenprimarily on account of the deregulatorypolicies pursued by leading Western coun-

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tries. We are told that we must avoid at allcosts making things any worse than theyalready are, say by allowing the collapse ofthe euro. This sounds plausible, but it doesnot relieve its advocates from the burdenof proof. They have to show why the re-sulting economic dislocations would beworse for citizens than the loss of democ-racy that they, the advocates, are willing toput up with. It would certainly not be easyto calculate the final bill if one had tobalance off the advantages in financialpolicy against the disadvantages to democ-racy.But it is not impossible.Still,up to thispoint no one on either side has actuallyfigured out the bottom line. But even ifthis were actually done convincingly, onewould have to admit that democracy hadended up the loser. This is being called aclassic trade-off: less democracy in ex-change for preserving the ability of de-cision-makers to act quickly in a crisis.

All this compels us to reflect on mat-ters of principle. Is it even possible to movetoward »communalization« of nationallaws and the policies of nation-states, i.e.,toward the deepening of the EU, withoutundergoing a decline of democracy? Or isanother trade-off looming on the horizon?

Trade-off II: Nation-state vs.Post-nationalism

Historically, democracy has undergonetwo great spatial transformations. The firstone occurred when the direct democraciescharacteristic of ancient Greek city-statesevolved into the indirect, representativedemocracies that began to emerge in Euro-pean and North American territorial statesbeginning in the eighteenth century. Thedirect, but also exclusive, character of Atticdemocracy was transformed into a pre-dominantly representative form of democ-racy that gradually lost its exclusive char-acter due to the introduction of universalsuffrage in the twentieth century. Democ-racy became indirect, yet at the same time

more inclusive – a reasonable compensa-tion for what was lost.

The second great territorial trans-formation of democracy, underway forquite a few years now, involves a transfer offunctions from national representativeinstitutions to supranational organizationsand regimes. Unlike the first metamor-phosis, this one threatens to leave us with-out any comparable democratic compen-sation. That observation appears to holdtrue for the global regime, which includessuch bodies as the World Trade Organi-zation (WTO) and the IMF, and still morefor regional organizations such as the EU.But the institutional creativity and polit-ical will of the EU have so far not beensufficient to outflank the transfer of func-tions to the all-European level by enhan-cing the potential for democratic parti-cipation, representation, and supervision.It is possible to do all this, but so far ithasn’t happened.

It is not good enough to meet this cri-tique by offering its proponents the cheapadvice that they should build support fortheir proposals and engage in the work ofdemocratic persuasion. That sort of adviceis as old as the European deficit in legiti-mation itself, but so far it hasn’t changedanything.

It is not only the »subjective factor«– the democratic will to effect change –that is lacking here. It is objectively diffi-cult to create a consensus among 17 of the27 member states. They are much moreheterogeneous, far more deeply riven byprofound economic, social, and mental-cultural cleavages than is any individualEuropean country within itself. To be sure,we should by all means protect and pre-serve differing historical traditions, lan-guages, myths, and symbols. But when itcomes to political decisions, the countriesin question should be willing to acquiescein common resolutions and in some casesjust line up behind them. Despite the prin-ciple of subsidiarity, this is not an easy

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thing to do. It requires a willingness tocompromise, mutual acceptance, and tole-rance. These qualities are not to be had atbargain-basement prices even in federallyorganized nation-states, as Germany’sperpetual quarrels over financial equal-ization among its states, and the nation-ality conflicts in Spain show. The EU canno longer allow the evolution of a com-mon legal code and political decision-making to race so far ahead of democraticsafeguards as has been the case in the past.In its previous decisions on Europeanissues, Germany’s Constitutional Courthas consistently expressed its reservationsabout the eclipse of democracy at the EUlevel. If their reservations are not takenseriously, that will only stoke the national-chauvinist fires of right-wing populism.

The history of European integrationexhibits a consistent pattern. Persuasivesuggestions for offsetting the decline ofdemocracy at the national level by expan-ding it at the European level have eithernot been put forward at all, or else theyhave not been effectively implemented. Inparticular, democratic values of transpa-rency and oversight of decision-makinghave been more weakly developed at theEuropean level than they have been in thedemocracies of individual countries. More-over, civic participation leaves somethingto be desired. Let’s take the case of theEuropean Parliament (EP). In 1979 directelection of representatives to the EP wasintroduced in order to strengthen parti-cipation and representation at the Euro-pean level. Since that time, the EP has beengiven additional functions. In spite of allthat, average rates of voter participationhave been declining, literally in every singleelection. In 1979 turnout rates stood at65.7 % of eligible voters; by 2009 they hadfallen to a mere 43 %. In six countries voterturnout in the last election was less than30 %. Another awkward fact to consideris this: there is a »social selection« takingplace in European elections, a creeping

self-exclusion of the lower classes thatis more pronounced in these electionsthan it is in their national counterparts.

The growth in the European Parlia-ment’s legislative reach has gone hand inhand with the aforementioned decline incitizens’ interest. Given that trend, thereis no way that democratic theory couldcountenance a further expansion in thefunctional scope of the EU Parliament atthe expense of national parliaments. It hasbeen proposed that the decline in voterturnout might be reversed by bestowingstill more functions and visibility on theEuropean Parliament, but empirical expe-rience over the past three decades doesnot lend support to that claim.Why shouldit work any better in the coming decades?Even if matters take a turn for the betterover the long run, voter turnout in EU elec-tions will still not catch up to the nationalrates of voter participation anytime soon.

If one considers the problem solelyfrom the perspective of democratic theory,a further drift of functions toward theEuropean Parliament and the EU cannotbe legitimized. This is an imperative thatflows from democratic theory, not natio-nal political considerations. Each addi-tional step in the direction of Europeanintegration has to be accompanied bya deepening of democracy. That is theonly way that European integration willtranscend its elitist character and becomea democratic project of the peoples of Eu-rope. Direct election of the Commission’sPresident or Europe-wide referenda wouldbe important steps in the right direction.But here again we must bear in mind thatthe self-exclusion of the lower classes ismore severe in referenda than it is in na-tional general elections.

Trade-off III: Output vs. Input

If the EU were thought of as a country see-king membership in the European Union,

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its petition would be rejected because itwould not be able to meet the requisitestandards of democracy. That witticism iswell known. It is unrealistic to assume thatanything essential in that state of affairs isgoing to change quickly. The EU will notattain the same quality of democracy asSweden, the Netherlands, or Germany.Nevertheless, this certainly does not auto-matically rule out steps toward furtherintegration.

That is the case because democracyhas both an input and an output dimen-sion. The input dimension includes theinstitutions and procedures of democraticparticipation, representation, and decision-making. The output side is embodied inthe material results of the decisions thathave been reached, i.e., such goods as peace,economic welfare, legal and social security,and generally the opportunities in life en-joyed by all citizens. The accomplishmentsof the European Union and its predeces-sors, the EEC (European Economic Com-munity) and EC (European Community)are indeed impressive. The EU has spurredthe exchange of goods and services, andenhanced the mobility of capital and labor.In this way it contributed in no small mea-sure to Europe’s prosperity, even thoughthere have been losers as well as winners,and the social components of the EU haveclearly lagged behind the neo-liberal legalframework for competition. Likewise thehistorically unprecedented reign of peace inEurope has come about thanks to its inte-grated community.Without the cohesion ofEuropean states and peoples, Europe couldnot maintain its affluence. It would be-come uncompetitive in a globalized world.

The EU’s legitimacy has always owedmore to the output side than to the inputdimension. It can be legitimate to compen-sate for losses on one side of the ledgerwith gains on the other as long as theseoffsets are accepted by the citizens and thenormative and procedural substance ofdemocracy is not jeopardized. But at pre-

sent neither of these conditions is auto-matically being met. In the midst of theeuro-crisis the European Commission, theECB and – last but not least – the presentGerman government are exporting thatGerman invention, the debt brake, andthus driving the entire Union into deepdeflation. Greece’s GDP, for example, hasalready fallen by one-fifth since the out-break of the crisis, and every day 1,500people lose their jobs there. In Spain andGreece one-quarter of the active work forceis unemployed. No solution to the crisisis in sight. The crisis management of EUinstitutions and the leading member stateshas so far proven ineffective.Ordinary citi-zens understand that as well as the experts.Thus, the output legitimation of the EU isin trouble, since the troika has not beengentle in its handling of sovereignty rightsand parliamentary oversight prerogatives.But if input legitimation is being narrowedin scope just at the same time that outputlegitimation is falling into crisis, then im-portant sources of democratic legitimacybegin to crumble.

Cutting democratic losses

What is really at issue here is not whetherwe want »Europe,« but what sort of Euro-pean Union we would like to have. Notevery critique directed against Europe canbe classified among the usual suspects:parochialism, nationalism, and clinging tothe past. If we are going to describe Euro-pean competition laws and the specificconstruction of the European internal mar-ket as aspects of a neoliberal project, thenthe critique of Europe cannot be coun-tered by the argument that European inte-gration has brought the Continent fiftyyears of peace. A person is not necessarilya nationalist just because s/he does notbelieve in the glossy fairy tale that Europecan simultaneously be enlarged, deepened,and democratized. If someone does not

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think a circle can be squared, that certainlydoes not count as heresy. It is high timethat we put an end to the either/or debates,which are by now nearly as quaint as oldwood-cuts, and started thinking abouttrade-offs. Problem-solving capabilitiesand efficiency can have costs, especiallywhen trans-border issues are on the agen-da. We have to reflect on the question of

whether gains in efficiency will be achie-ved at the cost of less democracy. But theboundaries must be drawn more narrowlythan is currently the case with the frenziedexport of austerity. A democratic Europedeserves nothing less. European integra-tion can no longer be run as an affair of theelites; otherwise, both Europe and de-mocracy will be at risk.

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How can the EU restore the appeal it once held for its citizens? What kind ofEurope do we want? And how will Europe affect the German electoral campaign?The President of the European Parliament met with our interviewer, ThomasMeyer, to answer these and other questions.

A conversation with Martin Schulz

»Europe has to defend its solidarity-based modelof society, even in the age of globalization«

NG/FH: We have reached a fork in the roadwhere European policy is concerned. Atthis point we have to ask ourselves whatdirection we would like to take, what ouralternatives are, and what is at stake for us,the citizens of Europe, and for the membernations. What possible alternatives do yousee at this truly historic moment?

Martin Schulz: First of all I think it isnecessary to reject the statement that,»there is no alternative to Europe.« Thereare alternatives to everything. That is whatthe European debate is all about right now.Considering the trends of recent years, dowe have the courage to expand Europeancollaboration and the cooperation of na-tions and states in joint organizations, orwill we just throw in the towel? Are we goingto regress back toward a »protected home-land?« That would be the surest way tomake Europe insignificant in the interna-tional scheme of things.

NG/FH: But we are now in a situation inwhich citizens increasingly seem to be tur-

ning away from Europe, while many of thepoliticians in the EU member states havegrown weary of European unification.And this is all happening just when moreimpetus is needed to make a new start.How is the Europe of the future ever goingto come about against such heavy odds?

Schulz: We have to take the various con-cerns and needs of people in the membernations seriously and try to find solutionsfor them. Not everyone who criticizes theEU should be written off as an EU skeptic.I think of myself as a critic of the EU, butit is just this sort of criticism that makes itpossible to identify and correct the Union’sshortcomings. In order to do that we haveto ask ourselves again and again what theidea is that underlies European unification.

In the 21st century European states andnations are facing a set of questions thatnone of them is able to answer by itself.No nation-state acting on its own couldrespond to the dilemmas of climate change,economic transformation, and the inter-dependence of international financial mar-



kets. Under those circumstances all of uswould quickly run up against the limits ofour own capabilities. To solve problemslike these we need the energy of the 500 mil-lion people who still inhabit the wealthiestportion of the earth. Of course there are anumber of politically formidable countriesin the region, but none is strong enoughanymore to go it alone in the global arena.That is the reason why we need the Euro-pean framework which we call the PoliticalUnion. Yet unfortunately it is also quitetrue that just when we need more Europe,people have become more skeptical. Butwhat is the target of all this skepticism? Isit directed at the idea of an integrative pro-cess designed to handle new challenges,or perhaps at the institutions as they arepresently set up? I believe that people areturning away from the EU’s formal struc-ture, which is not legitimate or transparentenough as measured by the usual demo-

cratic standards and remains hamstrungby the principle of unanimity that prevailsin the European Council, in which theheads of government meet.To enhance theEU’s appeal for all its citizens, we have totackle precisely those issues.

NG/FH: But in order to accomplish that, theEU needs new forms, new institutions,and new regulatory instruments. Whatposition have the Social Democrats in theEuropean Parliament taken on this, andwhat role are the German Social Demo-crats playing?

Schulz: To begin with, let’s keep one thingin mind: in agricultural, economic, andmonetary policy, in environmental policy,and in many other areas we have long sincerelinquished our sovereignty and trans-ferred it to the European level. Accord-ingly, the EU has already become a quasi-state in certain areas, but we have not yettransferred to it the model of a division ofpowers which we know from the contextof the nation-state. There is no Europeangovernment that can be invested by a par-liament or removed from office, no govern-ment that has to be accountable to the Eu-ropean public. But that is exactly what weneed: a government responsible to parlia-ment for the areas which the EU controls.

NG/FH: And yet what a great many peoplefear is that Europe will expand such a go-vernment into a transfer system, so thatGerman tax revenues will flow uncheckedinto the coffers of foreign countries withinEurope. Is our future wedded to a modelsuch as this? And if that is indeed what thefuture holds, how do we communicate itto the citizens without frightening them?

Schulz: First of all, one has to be honest. Ina certain sense we already have a transferunion, and one that entails joint liability.To be sure, euro-bonds, a common debtrelief fund, and other such proposals were

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all rejected. In the meantime the crisis con-tinued to get worse, because the financialmarkets of course noticed that no instru-ments of control had been put in place, sothey could keep on speculating. It was notuntil the moment that the European Cen-tral Bank chief, Mario Draghi, announcedthat the ECB would purchase sovereigndebt to prop up the euro, that we succee-ded in reducing interest rates on loanstaken out by the crisis countries. Sovereigndebt held by the ECB is now guaranteed bythe bondholders of the ECB: that is, thestates of the European Union. De facto thismeans that there is joint liability. In casepayment were to be suspended, the bond-holders of the ECB would be liable for theunpaid amount in proportion to theirinvestment. This fact has to be made clearto the citizens. Beyond this the FederalRepublic of Germany has already guaran-teed more than 400 billion euros due tocommitments made in previous bailouts.Thus, anyone who claims that there is noliability union at present is pulling thewool over the eyes of German citizens.

To win people over once again in favorof the idea of European integration, I re-commend a look at the elections in theNetherlands. During the electoral cam-paign Diederik Samsom, chairman of thePartij van de Arbeid (PvdA), said right fromthe start that there would be another bail-out for Greece and that the Netherlandswould have a stake in it. The outcome ofthe election was that he won 24 % of thevote in the end, even though he had begunwith polls showing only 9 % support.Evidently, the voters respected his honesty.So when politicians honestly admit thatthey will have to run great risks to resolvethe crisis, but that inaction is far riskier,their forthrightness will have a politicalpayoff.And in the case of the EU it looks asthough we will have to run those risks tosave our currency from speculators, butthat we will have to explain why we havegone down this road.

NG/FH: And why would Social Democracywant to take this road and not a differentone?

Schulz: Just recently the Bertelsmann Foun-dation presented a study that investigatedthe follow-up costs in case of a collapse ofthe euro zone. One of the results was thatthe immediate follow-up costs for Germanyalone would amount to about 4 trillion eu-ros. In truth the euro is a real success story.It has been possible for us to keep interestrates and inflation low. Also, even thoughwe have a weak political system in the cur-rency bloc, we still have a strong currency.So why would we want to let the eurofall apart? The consequences for Germanywould be enormous.A new D-Mark wouldhave to be revalued upward, which wouldcause our entire export business to col-lapse, upon which thousands of jobs de-pend. So now we are facing a choice: arewe going to take certain risks to avert a sce-nario that would impose a disproportion-ately heavy burden on all of us, or not?

NG/FH: So then which politicians in Ger-many would be able to present and thenstick to such a risky line of reasoning?

Schulz: In Germany Peer Steinbrück hastaken a clear position over the past fewweeks and months. To be fair one mustalso say that Angela Merkel has not offeredentirely different arguments, but only latein the game, and when she is compelled totake that road. Of course, that is partly be-cause of the party she leads and the coali-tion partners she must please. But this sortof temporizing is costing the taxpayers ofEurope a lot of money.

NG/FH: Is it even possible for Peer Stein-brück and the SPD to go on the offensivein the coming months by advocating –and sticking with – a pro-Europe courseagainst the CDU and Mrs. Merkel? Aseveryone knows she has posed deceptively

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yet effectively as the guardian of Germantax money.

Schulz: The publicly cultivated image ofMrs. Merkel is of course misleading. Shedoes not refuse to spend the German tax-payers’ money, but she creates the impres-sion that such is the case. That is her stra-tegy. Yet the reality is that Germany isalready on the hook for 400 billion eurosin case doubts arise. Frau Merkel took onthose obligations. That is the reason whyit would be much more important in anelection campaign to unmask that falserhetoric and lay out the facts for people inan open, honest way. Another pan-Euro-pean problem is the self-empowerment ofthe European council, to use the words ofJürgen Habermas. The heads of state andgovernment have pulled all the decisionsup to their level and have tried more andmore to marginalize the Parliament andthe Commission.As a result, the EuropeanUnion is not making any more progress dueto the rule that decisions of the Councilhave to be unanimous. That doesn’t work,because there is always at least one head ofgovernment who is having problems in hisown country and wants to gain a higherprofile at Europe’s expense. That is why theLisbon Treaty intended to introduce theprinciple of majority rule in the EuropeanCouncil: to prevent vetoes by one or a fewcountries. But now this has been twistedso as to produce the opposite effect.

NG/FH: Supposing that we were to act onall of these arguments, especially the intro-duction of a system of economic gover-nance, albeit placed under stronger parlia-mentary control at the European level.Arethose the most important steps towardbuilding a new Europe, or are there otherthings that need to be done?

Schulz: Of course we need far more strin-gent supervision and re-regulation of thefinancial markets. As long as those mar-

kets remain deregulated, there is always adanger that similar crises will come backto haunt us. If one considers the evolutionof the crisis, it becomes obvious that regu-lation is necessary: in 2008 we had newindebtedness, on average, of less than 3 %of GDP in the EU. Then came the crisisand new indebtedness climbed to 6-7 %.Those debts were incurred in order to savebanks that had gotten into trouble throughspeculation or by their negligence in mak-ing loans that could not be repaid. Nowthose same banks that were bailed out bythe taxpayers are demanding higher inte-rest rates from the very countries thatsaved them. We must put an end to thisabsurd system. And by the way, it an ex-ample that illustrates very well why we needa European ratings agency that would applydifferent standards in evaluating banksthan the three American agencies use.

Another issue concerns the plannedintroduction of a financial transactions tax.Until now only eleven countries have ex-pressed interest in participating in its imple-mentation, but I am confident that quite afew more will eventually come on board.Another point that deserves emphasis isthe waning solidarity of wealthy individ-uals via tax avoidance and outright taxevasion. Why is Germany seeking to con-clude a bilateral agreement with Switzer-land rather than doing it jointly with theentire EU? If the EU had a tax agreementwith Switzerland, then we would have ac-cess to the billions of euros stashed awayby tax refugees from Greece. Thus, the re-quisite financial regulation involves muchmore than the prohibition on short salesand other measures already decided upon.Now in this context one constantly hearsthe argument that many reforms will haveto wait until a system of economic govern-ance has been put in place. But that is nottrue in the sense intended. Many measurescould be enacted even now. Yet of coursethere are always some EU member statesthat block agreement on such measures.

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NG/FH: Would all of this lead to a Europemoving along at different speeds, with theeuro zone as the core and the rest asperiphery?

Schulz: No, the idea of »17 plus X« is false.European treaties clearly state that all theEU member countries are obliged to intro-duce the euro, not just the 17 that havealready done so. The only exceptions areGreat Britain and Denmark, since theyhave so-called »opt out« clauses as far asthe euro is concerned. That is the reasonthat I advise everyone to think of ways toget the stronger European economies intothe euro, rather than always speculatingabout who might abandon it. One suchexample would be Poland, which is rightnow the most dynamic economy in theEuropean Union and has a pro-Europegovernment that has twice fended off theeuro-skeptics. The point is that we haveto take a different approach. To me thatwould entail a »27 minus X« strategy com-prising all countries except those that donot want to participate, meaning GreatBritain and perhaps Denmark. But evenDenmark has already linked its krone tothe euro and therefore has an interest in astable euro.

NG/FH: Now of course many of the re-forms you alluded to – and for that mat-ter the very momentum of the process ofintegration – have become controversial intheir own right. So where do the frontlines between advocates and opponentsof this project run inside the EuropeanUnion?

Schulz: That is not an easy question toanswer. The lines of conflict over the pro-cess of integration cut right across soci-eties, parties, and institutions. On thisissue there are hardly any homogeneousunits. But there are ways in which onecould break it down, for example over thequestion of how the crisis might be resol-

ved. The conservative-liberal camp is ban-king entirely on budgetary discipline toregain investors’ confidence and therebyto stimulate growth. But a policy of pureausterity does not work, as we see insouthern Europe, where the debt crisis hasworsened in spite of draconian austeritymeasures, because the economies therehave collapsed. The more left-leaning camp,by contrast, favors the budgetary disci-pline approach coupled with investmentsdesigned to foster new growth. But inaddition to this line of conflict there isanother one over the most desirable degreeof integration. Thus, for example, on onehand Great Britain is interested in a stableeuro so that it can continue exporting tothe European »near abroad«; but on theother hand that country rejects the regu-lation of financial markets in order toprotect the City of London. Naturally,everyone else is against that, so a solutionhad to be chosen that leaves the British onthe outside looking in.

A third line of conflict also touches onthe future financing of the EU. In thismatter, the countries can be divided intotwo camps: the »friends of better spen-ding,« roughly the countries that are netpayers, and the »friends of cohesion,« thecountries that are net recipients of EUspending. The interesting thing here is thatboth social democratic and conservativegovernments are to be found in each ofthe camps.

NG/FH: In Germany elections are nowscheduled for this year. During the Frenchpresidential election campaign, Merkeland Sarkozy closed ranks. Do you think weshould expect the same thing to happenbetween Hollande and the German SocialDemocrats?

Schulz: It is quite clear that a socialistgovernment in France would prefer to workwith a social-democratic counterpart inGermany than with a conservative govern-

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ment there. By the same token, AngelaMerkel naturally felt closer to Nicolas Sar-kozy than to François Hollande. There is apositive side to this development, since wein Europe are all in the same boat and haveto accept the fact that European interestsnow trump those of any one nation-state.Today we must take an interest in who isgoverning in other European countriesand how elections there have turned out.The results of any given election will entailthat one policy or another in Europe isgoing to acquire more advocates. For thatreason I am assuming that European poli-tics will also play a role in the outcome ofthe German electoral campaign.

NG/FH: Will the issue of Europe evoke a lotof controversy leading up to the Germanelections, or will parties be more inclinedto sidestep it, because there is not thatmuch difference between their respectivepositions?

Schulz: Both statements are correct. Thereis a great deal of common ground con-cerning the wish to stabilize and promotethe euro and Europe. Yet at the same time

there are certainly major differences in theways such goals might be achieved, andthose differences will become campaignissues. During the upcoming electoral cam-paign there will be a quite a bit of contro-versy over the question of who pays for cri-sis management. Will it be ordinary wage-earners and the more vulnerable membersof society? Or will it be those who actu-ally caused the crisis, the speculators andbankers. After that we will have to face thequestion of whether we are going to makeour continent fit for the 21st century byinvesting in the technologies of the futureand advancing needed structural reforms,or whether we will renationalize Europeand, by doing so, initiate its decline intointernational insignificance.

I am looking forward to this fight,because it will give us the opportunity totalk about what sort of Europe we want. Iwould prefer a Europe willing to defend itssolidarity-based social model even in theage of globalization, one in which respectfor human rights lies at the heart of our»brand,« and in which we remain leadersin developing high-quality, sustainabletechnolgies.

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The Greek crisis revealed weaknesses in the structure of the EU. Confined withinthe narrow boundaries of economic and monetary union, it has remained littlemore than a loose bundle of reforms and reactions. A new Europe, more sociallyoriented and committed to solidarity among its members, needs to be established.

Quite a few governments in Europe be-lieved that 2009 marked the end of the

debate on the future of the EU – and pre-sumably many more hoped that it did.First, the proposed European Constitutionhad gone down to defeat. Following itsdemise a substitute solution, the Treaty ofLisbon, had been painstakingly negoti-

Almut Möller

The End of the EU as We Know It

Almut Möller

(*1977) is a political scientist at theResearch Institute of the German Council

on Foreign Relations (DGAP) in Berlinand a consulting member of the SPD’sCommission on Fundamental Values.

[email protected]



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ated, then subjected to tough ratificationfights. In December, 2009, the Treaty finallywent into effect. That seemed to seal thedeal and enable governments to get back totheir day-to-day business after more thantwo decades of tinkering with the EU’sconstitutional foundation. Those nego-tiations had never been easy and, as thenumber of member nations increased andthe number of sectors to be regulated grewapace, they became more and more diffi-cult. The lesson seemed to be that the EUcould not be reformed much more, so thebest solution would be to close one’s eyesto the problems and make do with whatevercompromises had been embodied in theTreaty of Lisbon. In what was really a mo-ment of great success, European govern-ments grew faint-hearted, while doingeverything they could to deflect criticismof the new Treaty.

As the end of 2009 neared, the Greekdrama crashed down upon this fool’sparadise. In the months to come it becameobvious that European governments hadcertainly summoned up enough good willsince the Maastricht Treaty to institute aseries of institutional reforms.Yet in retro-spect it became obvious that they hadneglected one crucial »construction site«in their campaigns of reform. Even withthe justified exuberance that accompaniedthe fall of the Berlin Wall, the governmentsof the (at that time) 12 members of the EUcould not mobilize enough support duringthe Maastricht Treaty negotiations in theearly 1990’s to put their Economic andMonetary Union (EMU) on a solid footing.Of course, it would have required an enor-mous effort to persuade people in the EUto go along with serious reforms even then.But if that had been accomplished, Eu-rope’s nation-states would have enteredthe new century stripped of many of theirprevious powers and responsibilities. It isdifficult to say where the EU, especially itseuro zone, would be today if economic andmonetary ties had been put on a solid

foundation, but convincing argumentshave been advanced that the euro wouldhave strengthened the member-states eco-nomically and politically if it had beenpart and parcel of a »genuine« EMU.

All of a sudden the European questionis on the table again, and this time in amuch more radical way than in any of theprevious rounds of reform. The latter werepreoccupied with optimizing decision-making procedures and strengthening theEU’s democratic legitimation. Those effortssucceeded only moderately well, but theystill made possible a certain amount ofprogress. At bottom all of the rounds ofreform that have been held since Maas-tricht – Amsterdam, Nice, the debates overthe Draft Constitution, Lisbon – followedan institutional-bureaucratic logic.

Today much more is at stake: the futureof the monetary union and, closely con-nected with it, the future of the EU as such.In the first place, then, the current situa-tion evidently cries out for political resp-onses. It now looks as though the Maas-tricht package will have to be opened up forthe countries that belong to the euro-zone,and as yet we can only vaguely discern thecontours of new agreements that mightemerge on a banking, fiscal, economic, andpolitical union. Surely there is always theoption of withdrawing from the debateand pointing out that conclusions must bedrawn from the fact that the idea of a uni-ted Europe, once so promising, has begunto lose its luster.

But there is a more worthwhile optionthan standing aloof from the debate. Thatis to seize the opportunity with both handsand come to grips with the misguideddevelopments within the EU that none ofthe reform schemes of the 1990’s – noteven the Lisbon Treaty – were able to cor-rect. There is now a chance to fight andadvocate for a different kind of Europe, asa recent paper issued by the SPD’s Com-mission on Fundamental Values has ar-gued. The necessary leeway has opened up



so that the course toward a more soli-darity-based, democratic, and just Euro-pean Union can now be set. If that were tobe achieved, it would bolster Europe’s inter-nal cohesion so much that the EU wouldalso be stronger vis-à-vis the outside world.In the last few months the German Chan-cellor, Angela Merkel, has been tirelesslyrepeating her mantra that there are »noalternatives« to her European policies, inorder to mobilize support for them in theParliament and among the voters. But infact European policies, like all other poli-cies, always have alternatives, especially intimes of crisis. The chief agenda item nowis thus to clarify and elaborate those alter-natives. We need a public discourse thatdoes not take refuge behind empty sloganssuch as »more Europe,« or a »genuine po-litical union« or that assumes an unbrokenline of development toward communal-ization and centralization. Still less do weneed a discourse that tacitly threatens touse the »moral cudgel« against skeptics. Norshould a renewed discourse offhandedlybrand critics of today’s European Union as»hostile to Europe« just because they objectto the way areas of responsibility are par-celed out, or to a budget no longer suitedto the times, or to the lack of democracyand transparency that has surfaced so dra-matically in the current crisis.

No more patchworkrepairs

So what should any such »new EU« looklike, and how is it to be achieved? It reallydoes look as though the reconstruction ofthe EU would have to be so radical that itwould be equivalent to a founding moment.But the point here is not to tear down every-thing that has previously been accom-plished, but to make it clear that anotherround of patchwork repairs, such as theEU has carried out in previous rounds ofreform is simply unacceptable. Nor will

the kind of horse-trading among govern-mental representatives behind closed doors,which has long been common practice,lead to a sustainable outcome. It has nowbecome clear that only a more thoroughlyintegrated currency bloc will suffice toovercome the crisis. This will involve a longstep toward a new federal balance betweenthe EU and its members which will have tobe cushioned by democratic measures atthe national and European level. The newUnion will also entail bold steps towardintegration on the part of the 17 countriesthat belong to the euro zone, even at therisk – intentionally or unintentionally – ofleaving the other ten EU nations behind. Ifthe 17 and the 10 were indeed to get out ofphase, that could undermine the EU’s inter-nal market and put the entire EU at risk.For that reason alone the euro zone coun-tries will have to try to avert these risksas far as possible. If they don’t succeed,there is a risk that one evil (the vulnerablecurrency bloc) will be replaced by anotherone (implosion of the Union as such).

Is it possible in these tempestuoustimes to win an election by campaigningon the euro? That is a question raised bythis year’s federal elections in Germany.It definitely will not be easy. There aregrowing numbers of people, includingmany in Germany too, who by now havebecome skeptical of or even hostile to theEuropean Union, even though well-mean-ing contributors to debates on the EU arestill trying to gloss over this unwelcomefact. European policy has finally arrivedon the front pages, in parliamentary andelectoral debates, and in public discussions.And those engaged in European politicsoften exhibit a certain fear of ordinary citi-zens, who are now, as never before, askingthem tough questions about the costs andbenefits of the European Union for Ger-many and for themselves. Skepticism andhostility complicate the task of devisingpolicies that would enable governments toresolve the crisis. And those policies will

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have to be imaginative, since there is noblueprint to follow. We now need creativeideas about how to build the »new EU.«And we need answers that will convinceEurope’s citizens.

The fight for the new EU

Thinking about the future of the euro zoneand the EU as a whole requires us to leavebehind old stereotypes about the nature ofthe EU. The well-intentioned, consensus-oriented debate in Germany has been in-fluenced for decades by a kind of think-ing that has tended to limit rather thanamplify debates on controversial issues. Italso requires us to rethink central themesof the integration process in light of thecrisis and reinterpret them with an eye tofuture challenges.What can solidarity meanin the aftermath of the crisis in Europe?How might a political understanding ofthe EU’s final status emerge, as opposed toone based on geographical or functionalcriteria? The founding fathers and foundingmothers of today have the opportunity torethink the European Union of the 21st

century. How might the EU look as a socialdemocracy? And what narrative will sustainthis new Europe? As we survey the globalchanges now taking place, there is much tobe said for the idea that, in the end, ourprosperity and social cohesion in Germanywill hinge on whether we can lay thegroundwork for a common future in theframework of the European Union. Thatwould also reinforce cohesion within theEU, where more than three years of crisishave left their mark. But it would also pre-suppose a different EU than the one we haveknown up until now, one committed to theprinciples of subsidiarity, democracy, soli-darity, and justice. It would be an EU whichrecognizes that citizens are at the center ofwhatever it does, and that the Europeanlevel is not the most important referencepoint for most people in Europe. They will

continue to be more strongly attached totheir own countries, regions, and localcommunities. It would also acknowledgethat language barriers will never simplyvanish. Now the opportunity is there to resetour course toward this new kind of union.

Contrary to the dramatic statementsone hears in current debates, the otherEU countries do not expect Germany tofinance the future EU. Rather, they expectcompelling ideas that will guide our actionsas we build the new Union. In Germanyright now it is important to show that the EUdebate does include alternative courses ofaction. That is especially vital where youthare concerned, since they are beginning tolose their faith in the promise of Europe.

In the past, everyone talked of »brin-ging along the citizen« and »connectingthe citizen’s life-worlds with those of Brus-sels« in much the same spirit that peoplerotate prayer wheels in Nepal – and allwithout much success. The past few monthshave shown that people in Europe will getinvolved in European affairs when theyhave the impression that really importantdecisions affecting their future are beingmade, and when they have the chance tomake their voices heard in elections andplebiscites. In Germany they will have thatopportunity in 2013, while the next directelections to the European Parliament willbe held in 2014.

If European social democrats seize theoffensive and get involved in the impen-ding elections while offering credible Euro-pean programs, the goal of a new, socially-conscious, democratic Europe is withinreach. The narrative for the 21st centurywould then be something like this: Europeis the place where we can be free in thefuture, because we have learned to assumeresponsibility for one another. That is sobecause we can only preserve freedom,justice, and peace on our continent byacting together. And only together can wecreate a union in which we and people fromall over the world will want to live.



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It may be that the worst is over. At leastthat is what the President of the Euro-

pean Council, Herman van Rompuy, saidwith some relief in the wake of the rela-tively uneventful meeting of heads of stateand government held last December. By»the worst« he meant the breakup of theeuro zone, perhaps even the collapse of theentire European Union. Even though mostEuropeans probably never seriously be-lieved that such things might come topass, it is nevertheless true that doubts arespreading about how or whether the pro-cess of European integration might go for-ward. The U.S. National Intelligence Cen-ter recently published a study on globaltrends up to the year 2030. Its forecastersbelieve that the most likely scenario forEurope is a further waning of the Con-tinent’s political significance coupled withits relative economic decline. The studyidentifies several reasons for its pre-dictions, including demographic trends(which are stubbornly ignored, especiallyin German politics), deficiencies in tech-nological development, and declining glo-bal competitiveness. But the most fun-

damental shortcoming, according to thisreport, is the political ineptitude of theEuropean Union. Of course, things do nothave to turn out the way the study fore-casts, since our future still lies in our hands.But how long will that continue to be thecase?

Yet van Rompuy’s cautious optimismalso has solid evidence to back it up. Mone-tary union is still a going concern. Greececontinues to be part of the currency blocand seems likely to remain so. The inter-national exchange value of the euro hasfound a level that is appropriate and quiteadvantageous for us. The rate of inflationremains low. The debt burdens on Spainand Italy are decreasing. Europe’s politicalslalom course is often referred to euphe-mistically as »line-of-sight« navigation,but it has nonetheless brought forth someresults about which no one need be em-barrassed. The Fiscal Pact may improvebudgetary discipline in the EU; the Euro-pean Stabilization Mechanism (ESM) isbetter designed to permit timely inter-vention than was its predecessor, the EFSF;consensus has been reached concerningbanking oversight, although we still do notknow how to wind up the affairs of largebanks should that become necessary, nordo we know how to build a firewall bet-ween the banks’ risky speculative businessand their normal credit operations.Finally,the European Central Bank has now beenauthorized to fill the vacuum created bypolitical inaction, having become, for all

Günter Verheugen

What Kind of Europe Do We Want?

Günter Verheugen

(*1944) was a member of the EuropeanCommission from 1999 until 2010.

Today he teaches as an Honorary Professorat the Viadrina Europa University

in Frankfurt an der Oder.

[email protected]

»More Europe!« That is the widely accepted platitude we hear in most of theongoing discussions about ways to contain the crisis in the EU. It is easy to over-look the fact that the Continent’s population is going to gain confidence in itsinstitutions only when the individual citizen begins to equate progress in Euro-pean integration with an improvement in his or her own personal prospects. Inthis article a former EU commissioner shows how that equation can be made towork.



practical purposes, the lender of last resort.So far so good ... up to a point. It remainsto be seen whether the instruments at ourdisposal will suffice to overcome the debtcrisis once and for all. Besides that un-certainty there is another question thatremains completely unresolved. The wayin which the EU answers it will decidewhere we actually stand in the year 2030.This question may be posed as follows:How can we attain the level of politicalcompetence and economic strength ne-cessary to remain – and be regarded as –an equal participant in the world of to-morrow. The classical response to thatquestion is: more Europe. That is a respec-table proposal, at least if one disregards itsrather aggressive rhetorical tone, and theimplicit denunciation of those who seethings otherwise as bad Europeans whoshould be so kind as to get on their way.Such intolerance of dissent and doubt doesthe European cause no good. As a sub-stantive policy matter, »more Europe«means the transfer by EU member states offurther spheres of authority, ones belong-ing to core areas of national sovereignty,to the supra-national level. That is theway things have gone since 1957, and theywould doubtless have continued on thesame track if the crisis had only been aone-time slip, i.e., if there had not beensome fundamental problems lurking be-hind the debt crisis.

»More Europe«:what does it mean?

The question has to be asked: under theconditions that now prevail is it even rea-listic to advocate a policy of »doing whatwe have always done?« Indeed, would sucha policy even be desirable? In any caseit would not be realistic. In practice atransfer of spheres of authority entails achange in treaties. A new EU treaty wouldrequire ratification by 27 – soon to be 28 –

member states. A considerable number ofthem would have to submit the decisionabout a new treaty to a referendum. It isquite unlikely that the member states wouldbe able to agree on a new treaty in theforeseeable future.And it is even less likelythat any such new treaty would be able tosurmount the hurdles standing in the wayof ratification. The dim prospects of rati-fication are intimately connected to an-other fact: »more Europe« seems to agrowing number of Europeans more like amenace than a worthwhile goal. The wordhas gotten around that the advantages ofEuropean integration are very unevenlydistributed. That is the case for socialgroups and regions as well. The word hasalso gotten around that European politics-as-usual is the domain of the executive,where highly placed officials – and alwaysthe same ones – make decisions in back-room deals. It is no exaggeration to speakof a crisis of integration here, in the sensethat the legitimacy of European politics ismore and more being questioned, whileconfidence in Europe’s political leadershiphas been shaken.

This crisis of legitimation and con-fidence is not the result of the LehmanBrothers collapse and its repercussions.Poor crisis management by national gov-ernments and Brussels institutions cer-tainly intensified feelings of deep in-security, but did not create them. Let usrecall the years after 1989. European in-tegration had been until then a projectcarried out in and by the West; and then,allof a sudden, its pan-European dimensionsbecame visible. Yes, eastward expansionwas a strategically courageous response,but have the »newcomers« really arrivedin the EU? Are they really welcome andaccepted as full-fledged partners? Theythemselves do not see it that way. TheMaastricht Treaty, which was supposed tousher in a true political union, did notachieve that goal. Instead, it created amonetary union with severe construction

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flaws. Each additional European treaty hasjust barely squeaked through. The projectof an EU Constitution has failed utterly.We are witnessing strong tendencies to-ward re-nationalization. To be sure, thereare no true anti-integration movementsout there. However, populist and nation-alist forces in many places use Euro-skep-ticism and European uncertainty amongtheir own electorates as a transmission beltfor their own highly dangerous schemes.And then we have the Federal Consti-tutional Court in Germany. Althoughit is surely not hostile to integration, itsjurisprudence concerning European issuesadmits of only one interpretation: stepstoward integration following the usualpattern push the limits of what Germany’sBasic Law allows. The judges in Karlsruhehave indeed raised their index fingers in agesture of warning, but quite apart fromtheir concerns, we can no longer postponeconfronting the problem of how Europeandecisions are going to be given democraticlegitimation. What is commonly calledEuropean progress regularly runs afoul ofthe persistent will to defend the traditionalnation-state. Only a fully developed systemof parliamentary democracy at the Euro-pean level will change that.

Coherent policy making

We will not reach that point unless thepeople who live in the European Union arewilling to go along. It will not be possibleto carry out the required rebuilding ofEurope as a tour de force of the elite, evenif they were prepared to undertake it. Andthere are at least two areas in which re-construction is needed: foreign and secu-rity policy as well as the economic andmonetary union. The first step is to lay thefoundations for confidence: the individualperson has to see advances in Europeanintegration as bringing improvement inhis/her own life prospects. For that reason

I think we should worry about »more Eu-rope« only as a second step. The first stepshould be about creating a better Europe,a European Union that acts in accord withits own values by strictly limiting itselfto regulating only those things that thenation-state is no longer able to handle. Inother words the EU would stop regardinghomogeneity as European progress; in-stead, diversity would be celebrated as agood integral to national identity, i.e.,something worth protecting.

Let’s begin with the issue of money,something which – as has been so strik-ingly confirmed in recent years – puts anend to friendships. The European Com-mission showed itself to be tone-deafwhen if proposed a multi-year financialframework that implied that there wouldbe a considerable increase in the EU bud-get. It made this suggestion just at a timewhen it was calling upon the memberstates to exercise greater fiscal discipline,and even asking for the right to forcenational parliaments to accept such disci-pline.Although the whole European worldpainted the British as the villains of thepiece, they overlooked the fact that otherimportant countries, including Germany,likewise saw no reason why the EU neededmore money. In that situation the rightthing to do would have been to think moreseriously about how to use European re-sources in a more efficient, carefully tar-geted manner. The largest sources of spen-ding – the agricultural fund, the structuralfund, and research expenditures – shouldnot automatically be regarded as sacro-sanct. There are far too many projects thatgot approved only because there wereEuropean funds available for them, notbecause they were really necessary. Forexample, can a regional policy really becorrect if it results in widening the dispar-ities in the living conditions of people indifferent regions rather than narrowingthem? Or again let us look at the regulatoryframework for the European economy.

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Today, the EU not only bears responsibilityfor the single market in order to determinethat framework. In addition it has mean-while gained new, treaty-based legislativepowers, with which it can regulate eco-nomic processes and operations. What islacking here is coherent policymaking,even though the Commission, a collegialbody, would be well suited to coordinatepolicy. But in fact policymaking is frag-mented and contradictory. The goals ofindustrial policy collide with those of cli-mate protection; the objectives of energypolicy run counter to the factual circum-stances in the economies of individualcountries, etc. What is worse, during thecrisis little attention has been paid to real-world economic factors. And such neglecthas admittedly been due to German in-fluence. In fact regulatory requirementsimposed on specific countries have cre-ated and deepened the recessions there.There is no European treaty that wouldhave required any such thing.

The unrestrained juggernaut of Euro-pe’s regulation mania offers another ex-ample of EU overreach. In this respect ourprevious positions were actually moreadvanced. At one time the maxim, »thinksmall first« was a fundamental rule ofaction that was borne out by politicalexperience. It means that it is unnecessaryto impose European rules on businesscorporations and institutions when theiractivities do not cross national borders.The project of abolishing superfluousregulations or optimizing regulations toavoid placing needless administrative bur-dens on business enterprises has unfor-tunately ground to a halt, despite the pro-fessed commitment of the European Com-mission to »smart regulation.« More andmore rules, spheres of responsibility, bud-get posts, and of course new positions areconstantly being created. To stem the tideone would have to intervene deeply in themind-set and deeply ingrained habits ofEuropean and national bureaucracies. That

is difficult and controversial, but no treatyprevents us from doing it. It is a matter ofpolitical will and leadership.

Having said this much, we now cometo decision-making procedures. It doesnot appear as though the Treaty of Lisbonhas brought about a change for the better.What one does see in it is the establish-ment of the European Council as a sort ofEuropean super-government, except thatthe Council is more oriented to inter-governmental consensus. The heads of stateand government sit around there micro-managing everything according to theprinciple of homogeneity. The functionalsignificance of the General Council, whichis supposed to worry about the coherenceof EU policy, has been vitiated. Other coun-cils, notably the Competitiveness Council,on which the economics ministers serve,are caught up in minutiae. No one hasnoticed them making any truly substantialcontributions, for example explaining howthe real economy can once again createrobust, sustained growth. It goes withoutsaying that the capital cities of the EU haveto take an interest in making the councilswork better if they are ever going to im-prove, and that cannot be taken for granted.This observation seems especially applic-able to Germany, where European policy iscrafted by a handful of high-ranking offi-cials in the Chancellor’s office (and some-times still by a stray finance minister), butthere is no true coordination and priority-setting that transcends the purview ofspecific agencies and bureaus.

This list could be lengthened, for ex-ample by adding the pseudo-common for-eign and security policies. What emergesfrom all this, however, seems to me prettyclear. We do have a need for reform in theEU where our methodology and settingof priorities are concerned. I repeat: nonew treaties or institutions are needed toaccomplish those reforms. What is ne-cessary, however, is that the responsibleparties should comprehend and take se-

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riously both the national dimensions ofEuropean decisions and the Europeandimensions of national decisions. It is alsonecessary for those in positions of respon-sibility to summon up the courage to talkhonestly with people about our strengthsand weaknesses. Above all they have tounderstand that, given our present situ-ation, we can no longer gain national ad-vantages to the detriment of others in Eu-rope or of the entire European project.

Once all this has been accomplished,we will have to carry on some intensivediscussions about how to make democracywork on the European level. But if we failto make the best out of the circumstancesin which we presently find ourselves, wewill eventually reach the point where wefall into the worst case scenario that theAmerican analysts predicted. Then no onewill have to take us Europeans seriouslyany more.

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When we talk about Europe, we almostalways end up discussing sovereign

loans, indebtedness, austerity programs,bailouts, protection of creditors – in short,the administration of programs designedto deal with the multiple causes of the »cri-sis.« And no word is used more frequentlynowadays than »crisis.« Yet it is rare for theconversation to turn toward the real Eu-rope: a continent with great political andgeographic diversity as well as a rich histo-ry and culture. This landmass got its namefrom a Phoenician princess who is sup-posed to have set foot on its soil – allegedlyin Crete – several thousand years beforethe Common Era. There are quite a fewfamous figures in European literature: DonQuixote, the knight who cut such a sadfigure; Hamlet, the perpetual doubter;

Oblomov, the superfluous man; and Faust,known for his relentless, troubled striving.We all know them and other such figures aswell: Don Juan, Till Eulenspiegel, Tartuffe,Robinson Crusoe, even Sherlock Holmes.Although they come from different nation-al literatures, they have entered Europe’scommon cultural memory. There they havelong since taken on lives of their own,quiteseparate from that of their creators.

Other authors have used and reinter-preted these figures, bestowing on them acontinuing existence in the universe ofimaginative literature. There are GermanHamlets, English Don Quixotes, RussianDon Juans, and French Robinsons. Thesefigures have long since become sourcesof inspiration for other art forms too, in-cluding painting, music, and cinema. Thislist alone suffices to show that there is in-deed something resembling a shared Euro-pean culture. But it is an altogether diffe-rent question how important this culture isto us, and what it might still mean to ustoday, in the midst of Europe’s grave crisis.

What sort of Europe did we have inmind 65 years ago, after the Second WorldWar, when we set about turning the idea

Hanjo Kesting

The Life of the Mind in EuropeArt and Literature as the Foundations of a Shared Tradition

Hanjo Kesting

(*1943) is the culture editor of this journal.His most recent publication, from

Wallstein Press, is entitled, Grundschriftender europäischen Kultur : Erfahren, woher

wir kommen (Basic Texts of European Culture:Learning where we come from).



– or, if you prefer, the vision – of a unitedEurope into a reality? That idea did notcome out of the clear blue sky; it arose fromanother, far more negative experienceon this continent: its self-destruction andself-mutilation in endless wars.As ThomasMann put it, »European wars will alwaysbe fraternal wars as well, as long as they arefought out on the terrain of the intellect.And that must always be the case.« To graspthe meaning of his remark, one need onlyconsider the first half of the twentiethcentury or, for that matter, just the thirtyyears from 1914 to 1945, the age of worldwars and totalitarian regimes.

These experiences were the seedbed ofthe European unification process, whichfound its first formal expression in theTreaties of Rome. Nationalism was to belaid to rest, hunger and mass poverty wereto be eliminated, and untrammeled capi-talism, which had led to the catastropheof 1929, was to be domesticated. Thesethree goals, political, social, and economic,were regarded as aspects of a unifiedwhole, as an inseparable triad.

It is not easy to recall the enthusiasmand euphoria that accompanied the ideaof a unified or unifying Europe in thosedays, not as we pass through the vale oflaments and worries about Europe as it istoday. The Europe of the postwar era wassupposed to be a project of peace, democ-racy, liberty, and shared cultural traditions.And these cultural traditions, spanningmore than 3000 years, really did exist. Theidea of Europe had long since become areality in them. Those traditions are whatconstitute the substantive core of Europe– the »old Europe,« as Donald Rumsfeldcontemptuously called it at the outset ofthe Iraq War. If this old Europe did notexist, then Europe would be nothing morethan a community held together by eco-nomic interests. But we must not inflictthat fate on our continent.

Above all else, Europe is an intel-lectual/spiritual space. There is no other

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way to put it. This space was alreadyin existence when Rousseau traveled toEngland to meet David Hume or whenBaron Grimm sent off his secret corre-spondence from Paris to Enlightenmentinsiders all over Europe, or when QueenChristine of Sweden invited René Descar-tes to her court. It existed even earlier(perhaps more fully than it does today)when the Scottish philosopher Duns Sco-tus went to Toledo in Spain to translatethe works of Aristotle from Greek andoccasionally even Arabic into Latin. Thesetranslations count among the foundationalacts that gave rise to a great intellectualmovement that spread from Italy and be-came known by its French name: the Re-naissance. That word means rebirth, andwas supposed to connote the resurgenceof classical antiquity. The ancient worldprovided the most powerful intellectualstimulus for it: patterns, models, criteria,mythological materials and historical sub-jects. All of this persisted far into the 18th

century, to a degree that it is nearly im-possible to imagine today.

French classicism in its entirety devel-oped under the aegis of antiquity, espe-cially its Roman phase. And one can saywithout any qualification that classicalGerman literature, which arose with suchamazing vigor and richness in the last thirdof the 18th century, derived its modelsfrom antiquity as well, but this time fromthe Greek rather than Roman phase. It maybe a truism of cultural history, but we haveto say it again anyway: without Socratesand Plato there would have been no Kantand Hegel. Without Aeschylus and So-phocles, there would have been no moderntheater – no Schiller,Kleist,or Brecht.With-out Solon and Pericles, there would havebeen no modern democracy. The Greeksfounded today’s system of law, they inves-tigated nature systematically; they foundout – as Heraclitus put it – that »all is influx,« that matter consists of atoms, andthat the earth is a sphere.



literature. Classicism had not come on thescene ex nihilo, and neither did the Sturmund Drang movement. Shakespeare was itsdirect inspiration, and Goethe’s speech,»On Shakespeare’s Day,« gave the signalto begin: »The first page that I read in[Shakespeare] put me under his spell forthe rest of my life, and when I finishedreading the first play by him, I felt likesomeone who had been born blind, butwhose sight was restored in an instant by amiraculous hand.« Ever since then, Sha-kespeare has been the regent of the Ger-man theater. His influence on Germanculture has been so powerful and pro-found, that people at times have wanted toturn him into an honorary German. Al-though Shakespeare was the archetypicalgenius, he showed little originality in hischoice of material. About a third of hisplays draw on English historical chron-icles; another third trace back to ancientsources; and the last third are rooted inItalian novellas from the Renaissance. Thematerial for such famous plays as TheMerchant of Venice, Romeo and Juliet, AsYou Like It, and Much Ado about Nothingwas not invented by Shakespeare. Their mo-dels were Italian novellas that were makingthe rounds everywhere in Europe at the time,most of them composed after the manner ofBoccaccio. His Decameron was the proto-type for many of them, yet they also drewon a great variety of narratives, includingsources from the ancient, Arabic, andmedieval worlds such as the story of theJew Melchizedek and the three rings, whichLessing borrowed for his Nathan the Wise.

So, when one zigzags his way throughEuropean cultural history, one is drawninto a network of infinite relationships, thestructure of which can never be made fullytransparent. If you leaf through the volumeentitled Stoffe der Weltliteratur (Materialsof World Literature) by Elizabeth Frenzel,you get the impression that almost all ofEuropean literature consists of variationson a few basic patterns drawn mainly from

Europe without Greece?

It is worth mentioning these cultural ties,because our politicians have not been shyabout taking modern Greeks to task. OneBavarian minister had the nerve to saythat we ought to make an example of theGreeks, pour encourager les autres, so tospeak. He seems to have forgotten thatduring the Greek liberation struggle at thebeginning of the 19th century, a member ofthe Bavarian Wittelsbach dynasty was thefirst to assume the Greek throne. At thattime Hölderlin wrote: »O Greece, wherehave you gone with your genius and piety?«Today people declare unapologetically thatthe prospect of Greece’s exit from the Euro-pean monetary union no longer frightensanyone. That may be true if one thinks onlyof the fear that once gripped the financialsystem at the prospect of Greece’s depar-ture. But isn’t it far more frightening toimagine Europe without Greece, and Gree-ce left to grapple with its own misery allalone? Such comments reveal a deplorableloss of consciousness, an atrophy of anybroader historical sense of what Europeanidentity and European values are all about.They represent a triumph of egoism andnarrow-mindedness that evokes the bitterlament of Hyperion in Hölderlin’s novelof the same name. In that work Hölderlintransforms himself into a Greek in orderto tell the Germans, now dressed in Greekgarb, their own history of suffering: »andso I came among the Germans,« writesHyperion, »barbarians from ancient times,who have only become more barbaricthrough industry, science, and even reli-gion, profoundly incapable of any divinesentiment ...«

A network of infinite relationships

Our classical age was preceded by what isnow called the Sturm und Drang, a briefbut boisterous epoch of new departures in

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classical antiquity. In a similar vein, theEnglish philosopher Alfred North White-head coined the witticism about the historyof European philosophy: »The safest gene-ral characterization of the European phi-losophical tradition is that it consists of aseries of footnotes to Plato.«

Europe and America

Of course a glance at the ominous fiscal andeconomic problems that threaten our pre-sent-day existence should induce us to ask aquestion similar to the one Hamlet asks inShakespeare’s play, when an actor presentsthe great scene of Priam’s death: »What isHecuba to me?« Today, the question wouldhave to be revised so that it asks: what areShakespeare and Dante, Homer and Vir-gil to us? How can they help us solve theproblems we have now? One could also citeMark Twain’s The Adventures of Huckle-berry Finn. The hero is a lovable vagabondwho prefers to dress in rags and live in a bigbarrel and refuses to be »civilized.«

It is no accident that Huckleberry Finnis an American, just like his creator, thewriter Mark Twain. Of the latter Heming-way once remarked that, »all modern Ame-rican literature comes from one book byMark Twain called Huckleberry Finn.« It iscertainly true that American culture emer-ged from European, and that they jointlyform what is known as »Western culture.«But we should not overlook the differenceseither.

When the American writer Susan Son-tag received the German Book Trade’s PeacePrize in 2003, she explored the reasons forthe alienation between America and Euro-pe in her acceptance speech, a tension thathad become palpable on account of the IraqWar. She warned against the assumptionthat the divergences reflected merely ev-anescent differences of opinion. Rather, sheargued, there is a latent antagonism in theirdifferences that is deeply rooted in history

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and was at work long before the currentalienation. Sontag explained that, from apsychological perspective, this antagonismwas »at least as complex and ambivalent asthat between parents and children.« Shedescribed the gap between the two conti-nents on several different levels: »Americaninnocence and European sophistication;American pragmatism and European intel-lectualizing; American energy and Euro-pean world-weariness; American naivetyand European cynicism; American good-heartedness and European malice; Ame-rican moralism and European arts of com-promise.« Behind all of these antitheses onecould allegedly detect the Americans’ wishto free themselves from Europe and becomeindependent, but at the same time the urgeto undermine and demolish the whole sys-tem of European values.The logical conclu-sion, as it were, would be that America wasfounded upon the idea of breaking with theEuropean past. Europe’s past, she argued,was thus not just an annoying burden toAmericans, but also – in its emphasisoncultural traditions – »thoroughly un-democratic.«

Europe-a cultural graveyard

There is no doubt that American attitudesmanifest a deep questioning of Europe,its culture, and its intellectual/spiritualidentity. One can observe something quitesimilar in Russia, which undoubtedly be-longs to Europe in a geographical sense, atleast as far as the Urals, but which has norole to play in the dream of a »United Statesof Europe.« In Dostoyevsky’s Brothers Kara-mazov, Ivan says to the younger Alyosha:»I want to travel in Europe, Alyosha. Andyet I know that I am only going to a grave-yard, but it’s a most precious graveyard,that’s what it is! Precious are the deadthat lie there ... I know I shall fall on theground and kiss those stones and weep overthem even though I’m convinced in my



Southern Europe as the Continent’sSeedbed and Heartland

We miss what is most important aboutEurope if we reduce it to its fiscal and eco-nomic dilemmas. To think about Europein new and more substantive ways, we needto bear in mind the truths of its past: theancient world, classical humanism, and theEuropean Enlightenment. We may evenneed the religious traditions of the Con-tinent to imbue the notion of solidarity –what the French Revolution called »frater-nity« – with new meaning. Catholic socialteachings emphasize this principle of soli-darity, as do Lutheran doctrines with theirexpectation that the state will provide careand support. Rigorous finance capitalism,by contrast, follows quite different laws,ones rooted in greed, selfishness, and ego-ism.Yet the doctrine of predestination doesgive that sort of egoism a divine sanction.That doctrinal heritage also plays somerole in the trans-Atlantic antagonism ad-umbrated above.

Naturally, the position of Europe inthe world has changed. One can discerninnovative movements of all kinds takingshape around the shores of the Medi-teranean, the full meaning of which isnot always easy to ascertain. And we mustnot forget the ceaseless flow of immigrantsfrom Asia and Africa. Both phenomenaprimarily affect Europe’s southern peri-phery, around the Mediterranean. Proba-bly this part of Europe will become evenmore important in the future. A previousFrench President even imagined a »Medi-terranean Union« of the former provincesof the Roman Empire, which once ringedthat sea. It was not intended to be a rivalof the European Union, but its completion.In any case, however one modifies the ideaof Europe for the present age, the Conti-nent can only rediscover and assert itselfby reflecting on its cultural tradition andthe richness of its culture.

heart that it’s long been nothing but agraveyard.«

The image of Europe as a graveyardsuggests that Dostoyevsky is deadly seriousabout turning his back on the old continent,because, as he sees it, Europe has only a past,not a future. Dostoyevsky thought that Eu-ropean life lacked the most important ele-ment of all: a religious essence. One can ob-serve something very similar in America.The United States is the only Western na-tion in which religion still plays a decisiverole. On religious questions Europe prettymuch abstains or remains indifferent.

There is no reason to suppress these»outsider« views of Europe: Dostoyevsky’stake on Europe as a graveyard and – as-suming he is representative of America –Donald Rumsfeld’s sarcastic evaluationof war-weary »old Europe.« Yet the verydeficiencies of Europe that these outsidersidentify also embody the strength andenergy of our continent. To repeat, it ismore than anything else an intellectual/spiritual space, and that is the underlyingreason for its unique attractiveness. If youtravel to California, the locals point outtheir oldest historical monuments: theSpanish missions along the Camino Realthat date back to the late 18th and early 19th

century. The only things in the state olderthan those missions are the rocks and thegiant sequoias.

Europe, by contrast, has an ancientculture: the Parthenon and the Colosseum;Florence, Venice, and the Sistine Chapel;the Prado and the Louvre; the tiny, ancientGreek Orthodox churches and the GothicCathedrals of France; the Charles Bridgeof Prague and Warsaw’s Wawel Castle. Eu-rope boasts Claudio Monteverdi, JohannSebastian Bach, Wolfgang Amadeus Mo-zart and its inexhaustible musical tradition,which must be defended today againstAnglo-Saxon pop music. Finally, it has agreat literature, the richness of which con-tinues to infuse other literatures, especiallythose of North and South America.

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Ever since the international financialcrisis erupted in 2007 one crucial un-

resolved issue has hovered in the back-ground: who will determine the coursethat the economy and society take? Will itbe untrammeled financial markets, drivenby anonymous managers responsible to noone and operating with unimaginable sumsof money, trolling for maximum yields?Or will it be institutions endowed withdemocratic legitimacy? One of the deci-sive political challenges of our time is toprovide an answer to that question andthus to put some political restraints onthe brand of capitalism that is driven byfinancial markets.

The crisis costs more than money. Inthe eyes of many citizens it violates theimperative of justice and any sense of mo-deration and fairness. They see themselvesas the underwriters of last resort who muststand surety for bank managers’poor deci-sions. It is vital that we regain the power toshape and direct events on financial mar-kets in order to fulfill one of the most im-portant conditions for political efficacy:confidence. This confidence has been lostin the aftermath of the financial crisis,because citizens no longer believe that po-litical actors wield the conductor’s baton todirect events. Yet confidence in the abilityof politics to shape and direct events is oneprerequisite for the stability and efficacy ofour social and economic order. Even firmsin the financial and real economies ulti-

mately depend on that stability as well.That is why it is essential that we must takesome bold steps toward the regulation andoversight of financial markets and try toencourage a new banking culture.

Between 2008 and 2010 European gov-ernments had to come up with 1.6 trillioneuros to bail out the banking sector. Thatsum is equivalent to 13 % of their entireeconomic output. Three quarters of thatamount was devoted to guarantees, while400 billion euros were set aside for directrecapitalization measures to be undertakenby the state itself. Therefore, we have longdemanded that financial markets shouldbe required to share in the costs of theprevious bailouts through a financial trans-actions tax. The groundwork for such a taxhas already been laid.

Every transaction would be taxed inwhich either the buyer or the seller is lo-cated in a territory where applicable EUguidelines are in effect. The only way forbanks to evade the tax would be to shifttheir registered places of business out ofEurope,which is not likely to happen.Only

Peer Steinbrück

Banks Must be Allowed to FailA New Bid to Restore Confidence

In September of 2012 Peer Steinbrück introduced a plan that would strengthen theoversight and regulation of financial markets. At bottom,what is at stake here is thefuture role of banks in the economy and society. Readers will note that the core ideasin his plan represent a significant departure from current government policies andthus afford a preview of one of the key alternative policy proposals to be offered tovoters in the 2013 elections.

Peer Steinbrück

(*1947) was the Minister-President (Governor)of the state of North Rhine-Westphaliafrom 2002 until 2005. From 2005 until 2009he served as the Federal Finance Minister.He is now the SPD’s candidate for the office ofChancellor in the federal elections scheduledfor [email protected]



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trades on the financial markets would betaxed. No taxes would be levied on sharesof stock or loans issued by corporations.

The EU Commission generally ratesthe impact of a financial transactions taxon economic growth as »negligible.« More-over, small savers would be exempt. 85 %of the business volume subject to the taxwould be generated exclusively by trans-actions between financial institutions. Ban-king commissions such as those providedfor in Riester contracts would be manytimes more costly than the amount thatmight have to be paid in transaction taxes.Even if banks shift the costs entirely tosavers, the latter’s burden would stay withinreasonable limits.

Banks should be allowed to fail! Weare asking for a European body to handleliquidations; this new institution wouldhave a restructuring fund available, finan-ced by the banks. Furthermore, we want toestablish a uniform European liquidationprocedure for so-called »system-relevant«banks and those whose operations tran-scend national boundaries. When a bankneeds to be bailed out, liability for the bail-out should first be assigned to the bank’sowners. Next in line would be the bank’screditors who should also be required toante up for some of the losses.

When it comes to financing the liqui-dation fund, at the very least we ought toskim off the interest-rate advantage thatthe big, system-relevant banks enjoy dueto the fact that – as markets are well aware– no country could afford to let such insti-tutions fail. This interest-rate advantage isimplicitly a government subsidy that banksnow cash in as profit. For Deutsche Banka banking levy at the level of the interest-rate advantage, around one to two billioneuros, would far exceed the current ban-king levy of roughly 100 million.

In other words, the banking levy theFederal Republic of Germany has imposedis really just a placebo.With the connivanceof the German government, banks are al-

lowed to buy their way out of their respon-sibility for a pittance and can continue topocket the profits they reap from their in-terest-rate advantage. In 2011, for example,only 600 million euros were collected fromthe levy. At that rate there is no hope ofaccumulating enough resources over thelong haul to liquidate a struggling bankwithout risk to the financial system. Thebanking fund would be restricted to banksthat operate across national boundaries.In effect, the banking fund would exemptall other banks (savings-and-loans, co-operative banks,and all small and medium-sized banks) in Germany from the risksthat larger banks assume. By contrast, theplans offered by the European Commissionare focused on the national level, whichmeans that the risks assumed by DeutscheBank, for example, also become the risksborne by small banks.

The time-tested German system of in-stitutional guarantees and deposit in-surance would be retained for small andmedium-sized banks. For that reason wealso oppose any European-level depositinsurance system.

Reducing the risks of extortion

In the case of banks involved in complexdeal-making, a way must be found to pro-tect the deposit-taking and commercialoperations of these institutions from theriskier trading activities characteristic ofinvestment banking. Big banks are crucialto Germany's export-oriented economy intheir capacity as providers of financialservices; hence, they should continue of-fering all of those services under the aegisof a holding company.

Under the auspices of such a hol-ding company, lending and deposit-related(commercial) businesses, investment ban-king and other operations would continueto exist, but now as legally and economi-cally distinct subsidiary enterprises with



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their own financial statements and boardsof directors. By separating these differentbusiness divisions, risk and liability wouldbe linked. Liability for risks would beassigned to the unit that had collected theprofits generated by those risks. But if ahigh-risk division incurred heavy losses,the damages would likewise remain con-fined to that division. All large banks withcomplex trading activities in investmentbanking would be required to separatetheir business divisions.

We demand an end to speculative pro-prietary trading by banks. Proprietary tra-ding includes all trading book businesscarried out with the objective of earningshort-term profits on the bank’s own ac-counts. Any institution that does pro-prietary trading should not be permittedto accept deposits or have access to centralbank funds. By the same token, banks thatdo accept deposits or have access to centralbank funds should not be allowed to haveholdings in other financial institutions,hedge funds, or other shadow banks thatengage in proprietary trading, nor shouldthey be permitted to refinance the latter.

Such regulations would exempt over90 % of banks, including almost all savings-and-loan institutions and cooperativebanks, because their activities are belowthe de minimus limit. In the few other caseswhere the regulations might apply, institu-tions could demonstrate that they shouldbe exempt because they do not engage inproprietary trading. Separating differentkinds of banking operations is no panacea,but it would insure that customers’ de-posits would not be used for speculation.That one measure alone would not sufficeto prevent every financial crisis, but itwould rein in the ability of big banks toengage in extortion.

Large commercial and investmentbanks are not immune to crises just be-cause they can spread risks across theirvarious internal operations. This sort ofhedging against risk always runs in one

direction only: low-risk business arrange-ments, e.g., those with corporations orprivate clients, serve to hedge against thehigher risks inherent in the (proprietary)trading business. But when speculativedeals go seriously awry, that kind of risk-spreading is never enough, and the de-posits of ordinary citizens are put in jeop-ardy, which means that the governmentagain has to come to the rescue.

Between 1932 and 1999 the UnitedStates maintained a strict separation bet-ween commercial and investment ban-king. Learning its lesson from the financialcrisis, the U.S. also introduced the so-calledVolcker Rule in 2010 which prohibits pro-prietary trading. In September of 2011Great Britain committed itself to a strictseparation of banking business operations.

On October 2, 2012 a group of ex-perts convened by the EU Commissionpresented its suggestions for structuralreform of the banking sector. In largemeasure the experts’ ideas dovetail withthe proposals adumbrated above for regu-lation of the financial markets. In par-ticular, the group of experts likewise pro-posed a separation between commercialand investment banking.

Shining a light into dark places

Shadow banks such as hedge funds,privateequity funds, and special purpose entitiesmake up an ever greater share of the finan-cial markets, even though they have notbeen thoroughly regulated. In the futureone principle should apply to the shadowbanking system: those in the same busi-ness should be subject to the same set ofregulations!

Many shadow banks have their head-quarters in tax havens outside the EU.Howshould they be regulated? Shadow banksrely on financing from the banking sector;in fact, they are often nothing but exten-sions of banks already located in Germany



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or elsewhere in Europe. If one could super-vise banks located in and capital flows outof Germany, one would thereby indirectlyoversee the shadow banks as well.

In many instances financial trans-actions have lost any connection to the realeconomy. Derivatives, for example, do notembody trades in real products; instead,they anticipate future price movementsor special risks. The bulk of these trans-actions are carried out as so-called over-the-counter (OTC) trades beyond the reachof regulated markets. We demand greatertransparency, oversight, and standard-ization of derivatives trading.

The involvement of banks and otherfinancial market actors in raw materialsmarkets has finally gotten out of hand.Banks buy and sell whole oil tankers anduse commodity futures trading to driveprices for food into the stratosphere. Weare therefore asking that banks be pro-hibited from using investment and indexfunds to trade in foodstuffs, agriculturalproducts and energy unless there is somereason related to the real economy for themto do so.

We demand an across-the-board pro-hibition on unsecured »short« purchasesof credit derivatives on governments,banks, business enterprises, etc. The un-secured shorting of credit insurance is abet that only pans out if the other partygoes bankrupt.

A large proportion of the trading doneon stock markets is no longer between hu-man beings, but rather between machines.Algorithms buy securities in large vol-umes, only to sell them again a very shorttime later, resulting in rapid price fluc-tuations that endanger the stability offinancial markets. The crucial point in anyeffective regulation of so-called high fre-quency trading is to set up an approvalprocedure for the algorithms themselves.

The German Federal Government in-sists upon an approval procedure for tra-ding houses and leaves oversight of the

algorithms up to them. We are asking fordirect control and the approval of eachalgorithm on its own merits. And anychanges to an existing algorithm wouldhave to be reapproved. We also demanda minimum holding period for stock ex-change orders generated by the algorithms.

The appraisal of financial products,risk management, and especially the secu-ritization of shareholders’ equity capitaldepend mainly on the ratings issued byspecialized agencies. The market for theseservices is dominated by three Americanfirms. If they turn thumbs down on a givencompany or institution, that can send thewhole economy into a tailspin.We demandindependent oversight of ratings issuedfor governments by the OECD or the IMF,a reform of the business model used byratings agencies, the establishment of aEuropean ratings agency in the form ofa not-for-profit foundation, and the devel-opment of ratings procedures especiallytailored to banks. It makes sense that Euro-pean influence should not extend to theinternal legal structure of the three U.S.ratings agencies, but that does not alterthe conclusion that they should carry lessweight in the European economy. There-fore, the proposed regulatory scheme fea-tures three alternatives that could be im-plemented in Germany or Europe.

Living up to our responsibilities

The financial crisis made it apparent thatmany banks had not reserved enough oftheir own capital to cover their losses, nordid they have enough liquid funds tomaintain their liquidity throughout thecrisis.Basel III calls upon banks worldwideto meet higher reserve and liquidity re-quirements (Basel III was the final packageof reforms approved by the Basel Commit-tee of the Bank for International Settle-ments in response to the weaknesses ofbanking regulation revealed by the global



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financial and economic crisis beginning in2007: editor’s note). It would be a goodidea to implement those reforms expedi-tiously, but without jeopardizing the supplyof credit to local governments and themiddle class. Moreover, the new regula-tions will need to be adapted to the threepillars of Germany's banking system andits high proportion of credit-grantinginstitutions that operate regionally.

The financial crisis originated in realestate bubbles in various countries (theUnited States, Great Britain, Spain, Ire-land), where mortgage loans covering upto 100 % of the total cost of the propertywere approved; indeed, some loans for upto 120 % were made in anticipation of ri-sing real estate prices. We favor the tradi-tional rule that mortgage loans should notcover any more than 80 % of a property’sappraised value, and we think that this ruleshould be legally enacted throughout Eu-rope. We want to protect citizens againstthe risk of excessive indebtedness. Theproposed upper limit of 80 % is alreadybeing observed by reputable banks in Ger-many; besides, it is consistent with theconsumer-friendly Warentest Foundation’srecommendation concerning proper levelsof home mortgage debt.

We are asking for a more appropriateremuneration system in the financial in-dustry. Among other things a better sys-tem would entail that: bonus payments notexceed an employee's fixed salary; all topearners and not just the board of directorsshould have to reveal how much they earn;bonus payments would have to vary in-versely with the level of risk incurred toearn them; and some limits would be pla-ced on the tax-deductibility of executives’salaries. At this time it is still legally pos-sible to impose limits on the amount of thedeductions that highly paid executives canclaim. For example, the corporate incometax has long limited the deductibility ofdirectors’ remuneration, such that only ½is deductible from taxable revenues.

Up until now when banks evaluatedrisks, they all too frequently closed theireyes to what was really going on so as notto jeopardize the profits of trading ope-rations.We insist that the risk models usedby banks be more carefully scrutinizedand subjected to more stringent limits.The currently existing loopholes used toevade equity requirements have to be eli-minated.

Oversight requiresa level playing field

The European Central Bank should ini-tially be given the task of acting as a regu-latory board, although we should bear inmind that its functions could later be spunoff. It would be responsible for heading offsystemic risks at an early stage and over-seeing big, trans-border banking opera-tions.Admittedly, the ECB is already deeplyinvolved in the financial markets. But inthe short run there is no other body be-sides the ECB able to take on the functionsof European oversight. In order to preventany conflicts of interest, we therefore askthat the regulatory function be kept strictlyseparate from monetary policymaking andassigned to a legally independent oversightentity. But as noted, eventually we wouldlike to spin off the ECB’s regulatory res-ponsibilities to some other body.

Democratic control of European ban-king oversight must be lodged in the Euro-pean Parliament. Oversight of small andmedium-sized banks (especially savings-and-loans and cooperative banks) in Ger-many should stay where it is: in the handsof the Federal Institute for Oversight ofFinancial Services and the German Cen-tral Bank. National oversight should bestrengthened by improving cooperationamong all the parties, accelerating theregulatory processes, expanding regula-tory authority, and improving the trainingand remuneration of regulators.



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The economic system of Western indus-trial nations has undergone funda-

mental changes since the end of the se-venties. As new government policies in-creasingly deregulated markets, controlover the means of production, and thusover returns on capital, shifted noticeably.The deregulation of financial markets ledto a situation in which more and morefinancial resources were being invested insecurities markets. The new owners in-creasingly tended to be institutional in-vestors acting in behalf of capital accu-mulated from a wide variety of sources. Incontrast to individual stockholders, whowere usually not very aware of what wasbeing done with their money, the newbreed of institutional investors activelyexercised their rights as the true owners ofthe securities purchased in their name.

The term »financial market capitalism«has been coined to describe a state of af-fairs in which firms are run in accordancewith criteria set by the financial markets.This trend has given firms in the finan-cial sector extraordinary powers via theirfunction as nodal points for the accu-mulation and distribution of capital. Theyhave gained a degree of control over themeans of production. As a rule, the losers

Gustav A. Horn

How to Achieve Effective Oversightof the Financial Markets

By now there is a broad consensus on the need for better oversight of financialmarkets, but not on how to accomplish it. Does there have to be an internationalagreement on every measure to be taken, or could Germany act on its own?

amid all these changes have been depen-dent employees, who now have to asserttheir interests against a coalition of in-vestors from the financial markets andmanagement. However, the full force ofthese power shifts has been moderated inGermany, because co-determination re-quirements have survived unchanged.

The most fundamental change in thestructure of the economy involves the in-creased mobility of finance capital. Thatmobility enhances the economic power ofand insures comparatively higher rates of re-turn for finance capital vis-à-vis real capitaland employees, who inherently react moreslowly. In turn, that advantage strengthensthe incentive to invest in finance rather thanreal capital, which only serves to enlargethe financial sector still more. Anothertrend has reinforced the first: on a globallevel the traditional pay-as-you-go systemfor old age provision is being replaced byinvestment in the financial markets. Thattoo quickens the influx of new money intofinancial markets and explains the rise ofpension funds, which now exert dispro-portionate influence due to their enormouscapital stocks which are always on the look-out for investment opportunities.

This shifting balance of power in thestructure of the economy is leading to aredistribution of returns; those from invest-ments or employment in the real economyfall as compared to those in the financialsector. But that is not a sustainable situationin perpetuity, because the expectations ofhigh returns in the financial sector cannotbe met over the long run. Returns to the fi-nancial sector ultimately depend on those

Gustav A. Horn

(*1954) is the Science Director at the Institutefor Macroeconomics and Research on the

Business Cycle (IMK) under the aegis of theHans Böckler Foundation and Adjunct

Professor at the University of Flensburg.

[email protected]



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achieved in the real economy. For thatreason finance capital is confronting thedanger of structural depreciation.

These trends also provide the mostcompelling reasons for strengthening regu-lation. The only way to correct the im-balance between the real economy andfinancial markets – which tends over timeto reduce returns – is to impose limits onthe activities of financial markets. That isalso the only means of overcoming thedanger of structural depreciation alreadyalluded to. Regulation makes investmentin securities less risky, and thereby rendersold-age pension plans backed by capital asurer bet, just to cite one example. Uncer-tainty is the raw material that financialmarkets deal in. Financial investors enableother financial investors and business cor-porations to buy their way out of uncertain-ty. In return they demand interest and pro-fits.Whenever the limits imposed on thesetransactions are too weak, trade in this com-modity can be expanded almost at will,since the uncertainty being marketed be-comes ever greater and more intensely felt.The results were evident in the form of thefinancial crisis of 2007 and its aftershocks.

All of these observations have universalvalidity. Because markets for goods andcapital in today’s economies are so closelyintegrated, the tendencies identified aboveultimately affect every national economy.But they are especially applicable to those,like Great Britain’s, in which the financialsector contributes a relatively high propor-tion of the value created across the entireeconomy. In that respect countries such asthese should be especially interested instricter regulation.

After all, the macroeconomic dangersposed by financial crises are especially acutethere. On the other hand regulation alsohampers financial transactions, therebyslowing down the expansion of this sector,which is so crucial to the entire economy.Moreover, there is also a considerable in-centive to free-riding behavior here. If reg-

ulation is relatively weak in a given econo-my, financial enterprises will want to moveoperations there, which means that the fi-nancial sector will expand more vigorously.On the whole a country such as Great Bri-tain is torn between two imperatives: im-posing strict regulation to meet its height-ened need for security versus creatingsufficient leeway for the expansion of thefinancial sector.

Analysis thus shows that there is anunderlying, objective need for stricter regu-lation across the board. For that reasoneven countries like Britain and the UnitedStates have long since enacted tougherrestrictions. Despite their flaws, someparts of their regulatory schemes, such asthe Dodd-Frank Act in the United States,go farther than any measures yet adoptedin Germany or the EU. Nevertheless, theyare mostly designed to limit banks, leavinga great deal of leeway for private equityinvestors. That is, the banking sector in-cludes only a part of the entire financialsector, albeit a highly important one. It cer-tainly makes sense to impose limits onbanking activities, not least to reduce therisk that the government will one day haveto assume the banks’ debts in order to sta-bilize monetary transactions. But the pri-vate equity sector poses dangers of its ownwhen high-risk financial instruments aretraded there that eventually lead to defaults.Hence, a rational scheme of regulationwould have to address this sector as well.

It is just at this point that the battlelines are drawn between the Anglo-Saxoncountries and the rest, since the formerwish to restrict tougher regulation to thebanking sector alone, leaving other finan-cial sector actors with enough elbow roomfor innovations that will continually en-hance the efficiency of the financial sector.At the same time, there is no obligation onthe part of government to assume any liabil-ity here. The actors have to assume thatthey will go bankrupt if they run excessiverisks. The idea is that, once they realize



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how vulnerable they are, that recognitionalone will put a sufficient damper on theirwillingness to take risks.

The problem lies in the integration ofthe banking sector with the rest of the fi-nancial sector. As the financial crisis re-vealed, this interdependence can allow risksto arc over from one part of the financialsystem to another. Countries such as theUnited States try to meet that challenge bysetting up a separate banking system, suchthat regulatory limits on integration preventweaknesses in one bank from spilling overinto the remainder of the financial system.But the problems with that sort of arrange-ment lie in the details. It turns out to be ex-tremely difficult and complicated to com-pletely understand, supervise, or in somecases even prohibit such interdependence.

Given this complex background, agradual approach to re-regulation wouldseem to be the most appropriate one. Tocreate the greatest possible commonality,all steps for which a broad consensus existsshould be enacted as quickly as possible.That would help prevent what might bedubbed »regulation evasion,« whereby fi-nancial institutions shift operations to morelax regulatory environments. In otherwords, the strict models prevalent in theUnited States and Britain should be adop-ted in all points concerning banking re-gulation. Among other things, that wouldmean setting up a separate banking sys-tem. Such a step would limit the bankingsector’s radius of action, forcing it to con-centrate on less risky forms of investment.

The arguments presented so far haveshown that even this level of regulation isnot sufficient to avert the risks to macro-economic stability.Consequently,a furtherstep is necessary: regulations must be en-acted that create a framework to limit therisks posed by other actors in the financialmarkets. This second stage will work best ifa uniform system of regulation is createdall across the euro area, especially if a trans-action tax is to be levied on all forms of

investment. The most sensible approachwould be to impose the tax on all transac-tions that involve institutions in the euroarea, since that would rule out regulationevasion. Furthermore, there is completeagreement about the need to register allfinancial transactions, for otherwise itwould not be possible to tax them at all.

Likewise negotiations should soundout the prospects for enacting further jointmeasures. It would be desirable if broadagreement could be reached on a rule thatfinancial instruments should be allowedon the market only with prior approval, orthat derivatives not backed by goods in thereal economy should be banned in principle.Additionally, structured investments shouldbe marketed only in a standardized form,sothat every investor knows what he or she isbeing offered. It would also be desirable ifunanimity could be achieved on all thesemeasures and others to follow. But if that isnot the case for all or some of those steps,then the remaining measures should beenacted in Germany alone in a third phase.

If that were to happen, Germany wouldhave an economy that handles financialtransactions in an especially restrictive way.That would have two advantages. First, itwould generally limit the negative effectsthat an orientation toward financial mar-kets entails. Second, it would make financialtransactions carried out with institutions inGermany appear especially safe. That couldhave particular appeal to investors who areinterested in security and therefore couldattract capital flows. It has been argued thatrelatively stringent regulatory measureswould limit the influx of capital.

However, that has been proven false inthe past, as the examples of Canada andSpain show, where relatively tough restric-tions were in place. The only drawback totougher regulation would be diminishedopportunities for employment in the fi-nancial sector. But considering the risksposed by that sector, this should be an easypill to swallow.



Released for the Friedrich Ebert Stiftung bySigmar Gabriel, Klaus Harpprecht, Jürgen Kocka,Thomas Meyer, Bascha Mika and Peter Struck (†)

Editorial StaffThomas Meyer (editor-in-chief and responsible),Lewis Hinchman (English language editor),Gunnar Hinck, Dirk Kohn, Klaus-Jürgen Scherer

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