German conservatives’ eurobond awakening

BERLIN — If Angela Merkel’s sudden embrace of a €500 billion debt-fueled fund to help Europe’s coronavirus recovery came as a surprise, her success in winning the endorsement of her own conservative party for the plan was a jaw-dropper.

For years, German conservatives railed against proposals in Europe that carried even the slightest whiff of joint liability for debt.

“We’re not going to overcome chronic indebtedness by dividing the debt amongst ourselves,” Horst Seehofer, then-leader of Bavaria’s Christian Social Union (and current German interior minister) said at the time of the eurozone crisis. Then-Labor Minister Ursula von der Leyen responded to a worsening of the crisis in 2011 by suggesting Germany demand gold reserves or stakes in industrial companies as collateral for any loans to fellow euro members.

Though Merkel shot down von der Leyen’s idea, the chancellor was hardly a pushover when it came to spending German treasure on eurozone weaklings.

Times have changed.

Conservative leaders say they have few qualms about accepting the common debt issuance as it doesn’t entail the kind of large-scale mutualization they so feared during the Greek crisis.

Merkel’s conservatives have put their weight behind the Franco-German plan presented on Monday — which would move the EU one step closer to a bona fide fiscal union — with almost no questions asked.

“We support Chancellor Merkel and President [Emmanuel] Macron’s joint initiative as a major contribution to European solidarity in the corona crisis,” the Christian Democratic Union’s parliamentary group said in a statement, released during the Merkel-Macron press conference.

“This is a process and it’s important that Germany and France take a common position,” Andreas Jung, deputy leader of the CDU parliamentary group, explained on German public television Tuesday.

Even Friedrich Merz, a prominent fiscal conservative who is running for the leadership of the CDU, praised Merkel and Macron for “a very good proposal.”

Conservative leaders say they have few qualms about accepting the common debt issuance as it doesn’t entail the kind of large-scale mutualization they so feared during the Greek crisis.

“This proposal shows that European solidarity can work without mutualization of debt,” Ralph Brinkhaus, the leader of the CDU parliamentary group, told Der Spiegel.

At least when it’s old debt.

Countries would not be allowed to use the money in the fund to repay existing obligations, which in Italy’s case totals about €2.5 trillion. The bonds sold to seed the fund would be issued in the name of the EU. That means individual members would only be responsible for repaying their own share (to be determined by the European Commission) and not liable for others’ portions.

At least in theory. It’s hard to imagine that Germany (even if it’s not legally bound) would allow the EU to default on the bonds if Italy or Spain couldn’t pay what they owed. The fallout would be too damaging. Such concerns are just one reason German conservatives rejected similar plans in the past.

So why did Germany’s conservative bloc go from being the scourge of southern Europe to its enthusiastic savior? In a word, business.

Unlike the euro crisis, which triggered dramatic turbulence in financial markets but left German industry unscathed, the corona pandemic threatens Germany’s own economic stability. The nations in the eye of the euro crisis storm, such as Portugal and Greece, were not key German trading partners. The countries in focus now — especially Italy — are a different story.

Italy is Germany’s fifth-largest trading partner with a total trade volume of more than €125 billion last year. Major German car companies and machinery makers rely heavily on suppliers in Italy’s northern industrial corridor. Permanent damage to those supply chains could also do irreparable harm to German industry.

That’s why German industry, traditionally close to the CDU, has been one of the loudest voices urging Berlin to push ahead with the recovery fund.

“The EU’s response should be unprecedented,” said Dieter Kempf, president of the Federation of German Industries, the country’s most powerful business lobby, in a joint statement with his counterparts from Italy and France last week. “In order to limit the damage to business and society from this crisis, we need a strong financial policy response with a strong show of solidarity for the hardest-hit countries.”

While Merkel appears to have secured the support of key conservatives, and the leaders of the Bavarian faction, her proposal has met with some resistance on the backbenches. Whether those voices, which are louder than they are influential, can mount a conservative uprising is doubtful, however.

For once, the rest of Europe needn’t worry about Berlin’s backing.

The German chancellor is riding high at the moment, with both her personal ratings and those of her party at their highest levels in years.

That’s why the opposition is unlikely to have much luck in derailing the proposal either. The liberal Free Democrats are sticking to their longstanding position that debt mutualization is a no-go. But with the party polling at just 6 percent in opinion polls, its influence is limited.

The far-right Alternative for Germany might have had more luck mounting a counterattack if it weren’t consumed by a civil war over some leaders’ ties to neo-Nazi elements.

For once, the rest of Europe needn’t worry about Berlin’s backing.

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