The two faces of the Euro

Their tenures did not really overlap, but their bitter clashes over the future of Europe made history. And while the significance of both men is widely recognised, the strong causal link between their conflicting visions and the EU’s current slump is not well understood.

Judging by the various obituaries, the two men are remembered for their ostensible differences: Delors, the flamboyant French, Roman Catholic, social democrat whose dream of a Keynesian Europe was British Prime Minister Margaret Thatcher’s nightmare; and Schäuble, the austere German lawyer whose fiscal Calvinism terrified deficit-spending southern European, as well as French, finance ministers. While both have been acknowledged as noteworthy Europeans, and thus foes of Euroskeptics, Delors is portrayed as the more impatient centralizer, in sharp contrast to Schäuble, who was reluctant to cede the German parliament’s powers to Brussels.

None of this is false. But the portrayal of the two men’s motivations and deeds it leaves us with is incomplete — and possibly misleading.

Delors’ tactical U-turn

By the time then-West German chancellor Helmut Kohl gave Schäuble his first cabinet position, a junior ministry, in 1984, Delors had just ended a hellish tenure as French president François Mitterrand’s first finance minister. Mitterrand’s government, comprising the Socialists and Communists, had been elected in 1981 on an anti-austerity platform promising egalitarian growth. Almost immediately after that election, French capital fled en masse to Germany.

To stop it, Delors had either to devalue the franc substantially or increase interest rates to economy-busting levels.

Under the European Monetary System (EMS), which Germany and France had forged with great fanfare in 1978, the exchange rate was fixed, and any devaluation of the franc required Germany’s consent. To grant it, Germany demanded a hefty price: a real wage reduction (a wage freeze amid high inflation), which the Mitterrand government had been elected to avert.

Delors was left with two options: tear up the EMS treaty (and devalue the franc unilaterally) or raise interest rates to a whopping 25 per cent.

He chose the latter, but capital continued to flee, while French income per capita fell by more than 10 per cent in three years. By 1983, Delors had adopted full austerity (including the wage freeze demanded by Germany), leftist ministers had resigned, and France was on the road to embracing Germany’s strategy of competitive disinflation (reflected in the strong franc policies that became standard throughout the 1990s).

Was that the end of Mitterrand’s socialist agenda? No, said Delors: to fight austerity at a European level, France first had to embrace it.

Pro-labour policies within France, Delors argued, would always be defeated by the Anglosphere’s financial markets betting against the franc, driving up the French state’s borrowing costs, causing capital to flee to Germany, and forcing the devaluation of both the French currency and the French state.

The only way to implement their 1981 agenda, Delors told Mitterrand, was to convince financial markets that betting against the franc was futile because it was indivisibly linked to the mighty Deutsche Mark. Their agenda could still triumph, but only at a pan-European level — a massive project which required “capturing” the Bundesbank (essentially adopting the Deutsche Mark through a monetary union) and, somehow, pushing German elites to adopt the French socialists’ agenda at the European level.

Persuaded by this analysis, in 1985 Mitterrand used his influence to lobby successfully for Delors’ appointment to the presidency of the European Commission.

From Brussels, Delors pushed for the introduction of the euro, using as his vehicle the famous Delors Committee.

Unlike true federalists who sought a fully-fledged democratic political union, Mitterrand and Delors never planned to end Europe’s intergovernmental decision-making framework, which they believed was better suited to their aim of projecting French government priorities and methods onto Europe.

What they craved was a monetary union that would spawn, surreptitiously, a fiscal (but not a political) union, which France would dominate.

A Shield Called Schäuble

Unsurprisingly, the Bundesbank saw these moves coming. From 1983 onward, the Bundesbank made aggressive monetary moves intended to give the Delors stratagem a series of bloody noses. Among German politicians, it was Schäuble who embraced fully the Bundesbank’s project of fending off Delors’ bearhug.

Schäuble had recognised in Delors a master tactician envisioning a Europe in the image of a Greater France that deployed the Deutsche Mark to fund social democratic policies. To counter Delors, the Bundesbank-Schäuble strategy was to push for a much smaller monetary union that would include only states with a current-account surplus and ultra-low government deficits.

Schäuble understood the political and geostrategic importance of including France, but the French would have to accept the loss of sovereignty over their national budget — a prerequisite for any deficit country to remain sustainably within a currency union that lacks a fiscal union.

In September 1988, Delors gave a speech to Britain’s Trades Union Congress that coincided with TUC members’ darkest hour — the aftermath of Thatcher’s third general election victory.

Delors outlined his vision of a “Social Europe”, in contrast to the “capitalists’ club”, as he described the European Common Market. Judging by the standing ovation he received, Delors had won over the British workers’ representatives.

On that day, Britain’s Labour Party began its shift from Euroskepticism to Europhilia. On the same day, and for the same reason, alarm bells went off in Thatcher’s head.

Weeks later, she delivered her famous Bruges speech, arguably the moment Brexit was conceived, in which she warned of the approaching European “superstate”.

Thatcher made the same mistake as Mitterrand: she had underestimated Schäuble’s capacity to crush Delors’ project. It was an easy mistake to make. The fall of the Berlin Wall was about to give Delors’ ambitions a major boost. In view of Thatcher’s opposition to German reunification, Mitterrand suddenly had the leverage he needed to force Kohl to acquiesce to a larger eurozone, including not only France but other deficit countries like Spain, Portugal, and eventually Greece, too.

Battleground Europe

Accepting the establishment of a large and heterogenous eurozone in exchange for France’s endorsement of German reunification was a battle that Schäuble and the Bundesbank agreed to lose. But Schäuble had not given up the fight.

Mitterrand and Delors, but also Schäuble and the Bundesbank, always knew that the heterogenous monetary union’s lack of a fiscal union made it brittle — and its lack of a banking union even more so. They all foresaw how a serious financial crisis would force Europe’s political class either to create a federal treasury, break up the existing eurozone, or accept Europe’s permanent decline. But they were at an impasse because of the clash between Delors (with Mitterrand’s backing), who craved what Thatcher perceived as a dystopic superstate, and Schäuble’s vision (backed by the Bundesbank) of a smaller eurozone within a larger, multi-speed EU. So, they all waited for the next great battle, which the first serious financial crisis would trigger.

By the time it happened, two decades later, Delors had retired and Schäuble was Germany’s finance minister, whence he dominated the Eurogroup — the informal council of eurozone finance ministers.

As soon as Lehman Brothers’ collapse in 2008 sparked the sequential bankruptcy of German and French banks and the insolvency of the Greek state two years later, Schäuble knew it was “game on”.

Schäuble foresaw that the French, carrying Delors’ baton in this three-decade-long relay, would use the crisis to press for their long-standing goal of fiscal union, starting with debt mutualisation. His defense strategy was to propose that insolvent countries be encouraged and helped to leave the euro.

Suddenly, Grexit was an alternative to harsh austerity and inordinate internal devaluation.

As a practicing Protestant ordoliberal with a chosen disdain for macroeconomics, Schäuble believed in austerity. During Germany’s reunification, he had played a leading role in impoverishing and actively de-industrialising East Germany for precisely the same reason that, after 2010, he became the champion of austerity across Europe: to maintain the postwar, mercantilist, West German business model.

But even Schäuble understood that the level of austerity imposed on Greece between 2010 and 2015 was excessively destructive. How do I know? Because when I was Greece’s finance minister, we spent hours discussing these matters, and he told me as much on several occasions.

In one of those exchanges, he went so far as to confirm that, in his view, the eurozone was “constructed wrongly” and needed a political union, which the French resisted. “I know,” I said, to encourage him to continue. “They wanted to use your Deutsche Mark but without sharing sovereignty!” He nodded in agreement: “Yes, this is so.

And I won’t accept it,” he continued. “So, you see, the only way I can keep this thing together, the only way I can hold this thing together, is by greater discipline. Anyone who wants the euro must accept discipline. And it will be a much stronger eurozone if it is disciplined by Grexit.”

Schäuble was under no illusions. Pushing Greece out of the eurozone had little to do with Greece and everything to do with France and Delors’ vision. He wanted France to grasp that, if they wanted the euro (which in our conversations he twice referred to as the Deutsche Mark), they had to welcome the troika in Paris and drop Delors’ dream of a Greater France in an EU frock.

His insistence on Grexit was a not-so-subtle message to the French political caste: Like Greece, you can have a respite from austerity only outside the euro.

The logic behind Schäuble’s position was simple: Given the eurozone’s bad architecture, post-2008 Europe faced three options, which he ranked in the following order:

Best Option: A smaller homogenous eurozone requiring only moderate austerity and allowing debt write-offs for the heavily indebted countries, in exchange for exiting the euro.

Bad Option: Maintain the original heterogenous eurozone at the price of massive austerity and no therapeutic debt write-offs.

Unacceptable Option: Delors’ vision of a fiscal union without a democratic political union – what Thatcher had labeled a European “superstate”.

Schäuble’s preferred option was a Greek exit from the euro. This would lead Italy and other deficit countries to follow Greece out within a matter of days, finally realising the Bundesbank’s original plan for a small, mercantilist eurozone within a larger single market.

French elites, along with their counterparts in Italy, Spain, and Greece, opposed this option fiercely, because they wanted their domestic assets to remain denominated in the euro.

To hide their less-than-virtuous motive, they made noises that the time had come to implement Delors’ original plan for fiscal union. But their hypocrisy was evident in the fact that even France’s Socialists were unwilling to supplement fiscal union with political union, lest French national sovereignty be imperiled.

Schäuble felt obliged to lay down the law: The Delors plan was unacceptable, not least because it would be politically impossible to enact in various national parliaments.

If heavily indebted countries wanted to keep the euro, it was they (not Germany) that had to impose massive, suboptimal austerity on their people (the Bad Option). To his chagrin, they agreed to do that. Crucially, his chancellor, Angela Merkel, under the influence of Mario Draghi, the president of the European Central Bank at the time, sided with them and treated her finance minister with considerable contempt.

A broken Schäuble acquiesced to Merkel’s choice, knowing full well that relying on so much austerity and money printing was suboptimal and detrimental not only to the deficit countries but also to the EU as a whole. Almost immediately, he signaled his readiness to leave the finance ministry and retreat into semi-retirement.

Merkel denied him, and not for the first time, the honor of the Presidency of the Federal Republic and offered him the wooden spoon of the Bundestag Presidency.

Today, both Delors’ and Schäuble’s visions lay in ruins, as if in a Greek tragedy.

The way the euro crisis was managed put paid to Delors’ vision of a Europe in the image of a social-democratic Greater France, and it ruined Schäuble’s attempt to safeguard the postwar model at the heart of a fiscally sovereign Germany that continues to lose itself in a mercantilist Europe.

Back when the euro was still on the drawing board, neither Delors nor Schäuble could have imagined, or would condone, Europe’s inane response to the euro’s inevitable crisis.

The combination of massive austerity and monetary largesse that preserved the eurozone in its original format, which both Delors and Schäuble correctly deemed unviable, is the reason why Europe is now politically fragmented and in secular decline.

History, once more, proved a cruel master of noteworthy Europeans who refused to see that Europe’s interests are in direct opposition to the interests of its ruling classes.

Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 party and professor of Economics at the University of Athens. Copyright: Project Syndicate, 2024.

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