Double Take

Finance Minister Scholz is looking a lot like Schäuble

20 Jahre “Spiegel Online”
Like finance minister, like finance minister. Source: Picture Alliance/DPA

Social Democrat Olaf Scholz has been German finance minister for six weeks and the country’s European partners are understandably itching to know his priorities. Is he another Wolfgang Schäuble, the iron finance minister he succeeded, who steered Germany through the euro crisis with a tough, some would say merciless, focus on austerity in return for bailouts? Or is he say, more cuddly?

Mr. Scholz, the former mayor of Hamburg, was asked that question just last week at a conference in Washington: Could he say what he’s going to do differently from Mr. Schäuble. The terse answer: “Nein.”

Some big decisions are pending on Greek debt relief and on planned reforms of the euro zone’s architecture for preventing a repeat of the euro crisis, and nothing goes without the “Ja” or “Nein” of the bloc’s biggest economy. Mr. Scholz will have to start laying his cards on the table very soon. Ahead of a key meeting with European finance ministers in the Bulgarian capital of Sofia this weekend, one high-ranking EU diplomat said Mr. Scholz’s position was the same as Mr. Schäuble’s — and German ministry papers seen by Handelsblatt tend to confirm that.

One of the issues being discussed is whether the ESM bailout fund is to become the financial backstop to the Single Resolution Fund (SRF), which finances the winding-down of failed banks. Southern European governments are pushing for this, but Mr. Scholz, like Mr. Schäuble, is stalling. The finance minister may have changed, but German public opinion remains firmly opposed to further bailouts of southern countries. Mr. Scholz will likely push for concessions to ensure he gets sufficient backing at home for changes to the ESM that will require two-thirds majority in parliament.

Greece’s lenders have already agreed that there should be further debt relief to help restore investor confidence.

EU diplomats said he will likely demand that future ESM bailouts require a greater input from the creditors of over-indebted states. Mr. Scholz is also putting the brakes on plans for a European Deposit Insurance Scheme (EDIS) to protect up to €100,000 ($122,000) of deposits in any euro-zone bank.

Before Germany signs up to the scheme, European banks must step up efforts to reduce their bad debt, he has said. “On EDIS, it remains true that a sufficient degree of risk reduction must be achieved before political discussions on EDIS can begin,” said a finance ministry paper seen by Handelsblatt.

The other big issue in the Sofia talks will be Greece, whose third bailout program runs out in August, after which the country is supposed to start financing itself independently again. Greece’s lenders have already agreed that there should be further debt relief to help restore investor confidence – but no agreement has been reached on the extent of that relief, which in turn will determine whether the International Monetary Fund contributes to the bailout program.

Mr. Scholz, like Mr. Schäuble and Ms. Merkel, wants the IMF to take part. He also appears ready to allow some debt relief — but only with strings attached.

The Germans want to attach conditions to the planned mechanism to provide more relief if Greece’s economic growth falters. “Weak growth would not automatically entitle Greece to reduce its debt servicing payments,” the German paper said.

Crisis in Greece
Financial street art. Source: Socrates Baltagiannis/DPA

The debt relief question is a tough one. On the one hand, the Europeans want to make sure that Athens sticks to its economic reforms once the bailout program runs out. On the other, financial investors may balk at putting their money in Greece if its debt relief is uncertain or is subject to too many conditions.

A confidential EU Commission proposal seen by Handelsblatt envisages making only part of the planned debt relief dependent on meeting conditions. That part would consist of the €4.1 billion in profits that the European Central Bank and other national euro-zone central banks have made on their holdings of Greek government bonds. The EU proposes paying Athens €950 million of those profits per year from 2019 through 2022 and smaller amounts thereafter as an incentive for the Greek government to stick to sound economic and fiscal policies. The condition may be that Greece must not reverse any of the reforms it implemented under the bailout program.

The Sofia meeting isn’t expected to yield firm agreements. It’s likely to provide Mr. Scholz with confirmation, if any was needed, that euro-zone reforms and Greek finances will keep him as busy as his predecessor. In that respect too, the two will have something in common.

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin. To contact the authors: hildebrand@handelsblatt.comberschens@handelsblatt.com

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