Europe in crisis – Looking back in the “golden 90’s” for answers

A study on the early stages of the European crisis and the role of social democratic parties

Nikos Koulousios

The relationship between Germany and France hasn’t always been so bumpy. There were many times in recent history that the two countries tried to speak with one voice, for the good of everyone. One of those times was when the German and French finance ministers were trying to draw a common line of defense against what they saw coming, against the structural shortcomings and inadequacies of the EU that would potentially damage the whole enterprise. Now that we have reached that point, now that we are closer to ground zero for the EU as we know it, it’s time to think back at these Franco-German alliances and common initiatives, see what they foresaw and what they were proposing and eventually examine how and why these initiatives were hindered, bypassed and demonized. And by whom.

Someone was driving this political vehicle, when it crashed to a dead end. It wasn’t some vague market forces. It was people and politics with a certain name.

Lafontaine and Strauss-Kahn, the red Cassandras 

Back in the early 90’s, German finance minister Oskar Lafontaine and French finance minister of the time Dominique Strauss-Kahn saw that within the newly formed monetary union, more economic coordination was needed within the Eurozone and between the Eurozone and the European Central Bank (ECB).

They believed in the harmonization of tax rates, especially for businesses and on capital gains. European countries should not be allowed to outbid each other on tax rates. That would simply be a race to the bottom. As we can see now, a bail out was needed for Ireland and Cyprus, two countries that for a long period of time benefited heavily from their low taxes for companies and capital.

As the BBC article reveals (December 1998), “Gordon Brown, the UK chancellor, is strongly opposed to plans to harmonise tax rates across the European Union (EU).”

Lafontaine and DSK took very seriously the pledge for more political integration, which in the eyes of the Euro enthusiasts would ultimately result from the European Monetary Union. Next to alleged economic benefits it would also bring the European Union a significant step closer to full political integration. Although the political union was never formally established by a treaty, it was certainly an absolute necessity in order for the Single Currency to endure and make any sense.

The things they demanded then, on a much smaller scale and a lower degree of intensity, are since the crisis put into practice. The European Central Bank is buying up treasury bonds of Eurozone countries and keeping interest rates at an extreme level 0,25 percent (Lafontaine back then suggested the interest rates should be lowered from 3.3 to 3 Percent). Oli Rehn and the Eurogroup chairman are together acting as European finance minister. A treaty for a European banking- and fiscal union is in the making.

Identified as one of the major causes the Euro crisis is the divergence of financial and economic policies and hence economic competitiveness between the Eurozone countries.

22 Oct 1998, Germany — Original caption: Dominique Strauss-Kahn, the French Finance Minister, and Oskar Lafontaine, the German Finance Minister meet for a conference. They are meeting to discuss an economic stability pact between the two countries. — Image by © Jean-Bernard Vernier/Sygma/Corbis

How Blair’s third way meant the end for social democracy in Europe

If we take a look at the political landscape of that time, we will find that since Tony Blair won the elections in England in 1997, the German socialists wanted to have a candidate that was more like Blair. They thought they could win with a candidate that was more Blair-like, on the right of the socialist party, following basically right wing politics. A candidate who was willing or eager to turn his back on traditional socialist principals and ideas, like higher taxes for the rich. A candidate who would lower  taxes for companies and for the rich, and would lower the capital gains tax. A candidate who would borrow heavily from the neo-liberal agenda. A candidate who wouldn’t push for too much regulation over the way financial markets work. They also thought that this kind of candidate will appeal sexier to the CDU voters and secure a victory. And so they went for Chancellor Gerhard Schröder.

Betrayed by Schröder, La Fontaine stayed party leader, became finance minister and Schröder became chancellor.

Lafontaine was the SPD party leader but he was more on the left side. The British media called him a “leftist Keynesian”. He wanted more regulation for the financial markets. DSK knew Lafontaine really well and they did share a common vision. They both wanted to coordinate more closely and more effectively their economic and monetary policies through Europe.

When Blair came to power, socialists in France and Germany also won the elections. That seemed like a great opportunity for Lafontaine and DSK to work on their plans. But New Labour had a different view. And the British media sought out to demonize Lafontaine and discredit the views he expressed.

British tabloid THE SUN run an article that had with the title: IS THIS THE MOST DANGEROUS MAN IN EUROPE? The article was questioning Oskar Lafontaine’s views during the Euro debate (25 November 1998). The British were ready to do anything in their power to stop the ideas of Lafontaine. They immediately sided with Schroeder.

“The government is bending its efforts to support Gerhard Schröder, the German chancellor, against Oskar Lafontaine, his finance minister” reads the very first line of the article with the title “The German who worries New Labour”, that was published on November 1998 on the New Statesman.

Why were the British so worried? The article explains it further: “At least as important as the differences on economic policy, however, is the perception that Lafontaine – a fluent French speaker from the extreme west of the country on the French border – will strengthen the already strong Franco-German link, and beat back Britain’s efforts to be one of the leaders of Europe. This is the “old” reason for Νew Labour’s distrust. Schröder, by contrast, is seen as pro-British.”

“He is also likely to wish to strengthen the “Euro X” committee – the group of finance ministers from the 11 European member states which are part of the single currency. Britain, in spite of protests, is firmly excluded from Euro X.” The British clearly had a lot to lose if Lafontaine’s ideas were to become popular and dominate the political discussion over Europe. And here comes DSK, to help with promoting Lafontaine’s ideas. The media already picked up on that.

The article continued: “The Franco-German desire to strengthen this is no secret, but it received a significant boost earlier that week from a speech in London by Dominique Strauss-Kahn, the French finance minister. Strauss-Kahn, speaking to mark the CEPR’s 15th anniversary, noted that he and Lafontaine had launched a joint paper on reforming the International Monetary Fund which called for the Euro X group to elect a president and vice-president – one of whom would always be from France, Germany or Italy. This proposal would see the emergence of a powerful figure who would, in effect, be the European finance minister – and who would conduct a dialogue with the central bank. Strauss-Kahn believes that the Euro X and bank presidents should be in constant touch, as Robert Rubin, the US treasury secretary, and Alan Greenspan, chairman of the Federal Reserve Board, are at their weekly breakfasts. Britain, however, will be outside this group for some years – possibly until 2005, according to some calculations. The consequences for Britain and for sterling could be severe – especially if the Euro X group succeeds in reaching agreed decisions on a routine basis. Hence the anxiety in No 10”.

Lafontaine and DSK believed in the harmonization of tax rates. As this BBC article reveals (December 1998), “A fierce row has set the UK at odds with Germany and France over the future of taxation across Europe and is causing a furor across Britain. Gordon Brown, the UK chancellor, is strongly opposed to plans to harmonise tax rates across the European Union (EU).” And, “Prime Minister Tony Blair also looks set to join the row when he attends an Anglo-French summit on the future of Europe in St Malo on Thursday. Although tax harmonisation is not officially on the agenda, Mr Blair is expected to tell the French government that Britain would veto calls for a European-wide tax structure.”

The Euro is coming

It is clear by now that Lafontaine and DSK wanted more coordination and the British wanted less. If we dare to look at the cause of the current crisis, we will see that there was no coordination of economic policy around Europe. On the contrary, countries were growing differently from one another. In Germany salaries were frozen and benefits were cut already since 2003, while in France and other countries they were implementing the 35 hour work week.

Lafontaine and DSK saw that to have a common currency, there needs to be more coordination. Because there is no coordination, one country would go one way, the other would go another way. The euro is difficult to fit in all countries, for some countries is too strong, for others is too weak. Lafontaine was pointing at the fact that there is competition among the EU countries about who has the lowest tax rates, who attracts more businesses. This is how tax havens are created. This is unfair competition.

A Franco-German alliance that never meant to be…

Lafontaine and DSK had a tough time convincing people. Those were the times. And to think that these were not even extreme left wing positions, but still they were crashed by the media, especially British tabloids. Here is another example of the media coverage that dominated at that time. This is again from the New Statesman (Nov 1998). “Lafontaine shares the French view that the European Central Bank must have a strong political input to counterbalance its strict mandate to ensure low inflation and stable prices.”

The holy principle at the time was that governments were not supposed to interfere with monetary policy at all. The national banks should only be concerned with keeping interest rates low, there should be no direct financing of government debt. These ideas are highly undemocratic and not always in the best interest of the country.

Lafontaine did not want to impose policies on the Bundesbank, he wanted them to coordinate their policies with the economic policies of the governments. The Bundesbank served as the model for the ECB. Only after the crisis, the ECB was forced to change its attitude. Now it is directly financing the debt of states, keeping interest rates at extreme lows (0,25%) and printing money in southern European countries.

Could the crisis have been prevented by giving up some of these orthodoxies before?

For example, they proposed that the national banks lower their interest rates to help more investments. However, those banks are supposed to be independent and not be influenced by politics. Lafontaine was not supposed to tell the Bundesbank what to do. But you cannot keep them separate. There needs to some coordination, politics have to come in. Shouldn’t economic policy and monetary policy have something to do with each other, go hand in hand? This is when the banks are responsible for the crisis.

The end of the duet

Not even in his own party did Lafontaine have any strong support at the time. The neo-liberal agenda was the mainstream and anything else was considered extremist and too lefty (old left wing policies). Why were they that dangerous?

The German and the French finance ministers went against all odds and lost. They wanted more economic coordination and regulation of the financial markets. Lafontaine after one year stepped down as party leader and finance minister. There were unfounded rumors about Lafontaine and sex scandals.

In 1999 DSK was accused of corruption in two financial scandals related to Elf Aquitaine and the MNEF. He was acquitted in November 2001, and was reelected in a by-election in the Val-d’Oise. In 2002, the French socialists lost the election to the conservatives. During the summer of 2005, he announced that he would be a candidate for the primary elections of the Socialist Party for the presidential election. At the same time, he co-founded the think tank À gauche en Europe (To the Left in Europe)

Strauss-Kahn then campaigned for the “Yes” at the French European Constitution referendum, 2005. More than 54% of the French citizens refused it, damaging Strauss-Kahn’s position inside the party. Strauss-Kahn sought the nomination for the Socialist candidacy in the 2007 presidential election, where he finished second, behind Royal. However, he had been widely expected to seek the Socialist nomination for President of France in 2012, and was considered an early favorite.

On 28 September 2007, he became the IMF’s new managing director and he pledged to pursue the reforms needed for the IMF to make financial stability serve the international community, while fostering growth and employment. Under Strauss-Kahn the IMF’s pursuit of financial stability has included calls for a possible replacement of the dollar as the world’s reserve currency.

Strauss-Kahn made comments that could be perceived as critical of global financial actors, in an interview for a documentary about the late-2000s financial crisis, Inside Job (2010). He said he had attended a dinner organised by former Treasury Secretary Henry Paulson in which several CEOs of ‘the biggest banks in the U.S’ had admitted they (or perhaps bankers in general) were ‘too greedy’ and bore part of the responsibility for the crisis. They said the government “‘should regulate more, because we are too greedy, we can’t avoid it.'” Strauss-Kahn said he warned the officials of a number of departments of the U.S. government of an impending crisis.

Strauss-Kahn resigned from the IMF on 18 May 2011, after being arrested by NY police on 15 May over allegations of sexual assault.

The two leaders, Lafontaine and DSK couldn’t fight the neo-liberal zeitgeist. DSK suffered a huge blow in his political future, while Lafontaine created Die Linke.

You can also read this article from The Guardian: Germany’s left is beginning to doubt the single currency