Speaking softly, but with no big stick

The EU’s top economic officer vows to uphold the strict limits on member countries’ budget deficits. But Pedro Solbes’ ill-starred showdown with Berlin implies that the EU lacks the will to enforce its own rules. Is this any way to run a monetary union?

The EU’s top economic officer vows to uphold the strict limits on member countries’ budget deficits. But Pedro Solbes’ ill-starred showdown with Berlin implies that the EU lacks the will to enforce its own rules. Is this any way to run a monetary union?

By Tom Buerkle
April 2002
Institutional Investor Magazine

Pedro Solbes likes to play by the rules. While serving as agriCulture minister in Felipe González’s Socialist government in the early 1990s, he discovered that Spain was exceeding its European Union quota for milk production. Instead of turning a blind eye and hoping to avoid the wrath of the European Commission , as many a minister would have done , Solbes flew to Brussels to confess. Faced with his candor, the commission not only dispensed with a fine but also agreed to raise Spain’s milk quota.

Now, as the EU’s commissioner for economic and monetary affairs , Europe’s top economic policymaker and, as part of his brief, chief enforcer of fiscal discipline , Solbes remains a stickler for the rules.

The most prominent recent object of his vigilance: Germany. In January, when the country disclosed a 2001 deficit equal to 2.6 percent of its GDP, Solbes didn’t hesitate to publicly propose that Berlin be given an official warning , the first such action since the euro’s launch three years ago , that it risked breaching the EU’s 3 percent deficit ceiling.

Simultaneously, he proposed an identical warning to Portugal over its looming deficit problems. In EU terms, merely to propose a warning is considered a sharp rebuke.

Solbes’ scolding of Germany was swiftly condemned by Chancellor Gerhard Schröder, who didn’t appreciate interference from Brussels at the start of a tough reelection campaign (see story below). Germany successfully lobbied its partners in the EU’s council of finance ministers to ditch the threatened warning in exchange for a fresh promise to balance its books , in 2004. The finance ministers also rejected the warning for Portugal.

The unwillingness of EU finance ministers to back up Solbes dealt a significant blow to the credibility of the EU’s Stability and Growth Pact, the agreement that sets deficit limits. That it was Germany , the author of the stability pact , that rebelled against the rules underscored the EU’s lack of discipline.

“Germany has set a bad example in not trying to stick to the agreed European fiscal rules,” says Bundesbank vice president Jürgen Stark, who helped write the stability pact in the mid-1990s when he was deputy finance minister. “The credibility of the pact seems to be damaged in the short term.”

“The first time the EU has a problem with a big country, [finance ministers] sneak away,” adds José Luis Alzola, senior European economist at Schroder Salomon Smith Barney. “This is basically another demonstration that decision making in the EU, especially macroeconomic policymaking, is very difficult.”

For the financial markets, the moral is clear, Alzola contends: The EU has “effectively abandoned fiscal consolidation. We shouldn’t expect average real yields to be lower, because fiscal policy won’t help.”

Solbes, however, is unbowed. He remains determined to uphold the spirit and letter of the pact, even if his enforcement powers appear inadequate for the task. “We have done what we had to do,” Solbes said in a recent interview with Institutional Investor. “If a situation similar to this one is presented, of course the commission will react in the same way.”

The 59-year-old Solbes will need all of his tenacity in the months ahead. The showdown over Germany’s intractable budget deficit highlighted one of the inherent weaknesses of the euro: Although 12 of the 15 EU countries share a single currency and a single monetary policy, they still can’t manage to coordinate their fiscal policies well enough to support the currency and foster a robust rate of growth.

Perhaps more significantly, EU countries are not yet willing to back up the commission with genuine enforcement power. The rules exist on paper, but Solbes can only propose; the finance ministers dispose. And the German incident suggests that EU countries lack the willpower to obey and enforce the very rules they wrote.

In a telling earlier example, EU finance ministers rebuffed commission president Romano Prodi’s attempt last year to strengthen policy cooperation in the euro zone by requiring EU countries to consult among themselves and with the commission before adopting national budgets.

Nor did Solbes have much luck in his previous attempt to discipline a member state. He chided Ireland last year for using a massive budget surplus to cut taxes, saying the move violated the EU’s broad economic policy guidelines by threatening to fuel inflation. Irish Finance Minister Charlie McCreevy protested the reprimand and spurned Solbes’ call for spending cuts or tax increases to ease inflationary pressures , and got off scot-free. As it turned out, Ireland’s sharp economic slowdown effectively erased the inflation concerns, as the commission later conceded

Despite his policy sallies, Solbes is not a man to seek out confrontation. So soft-spoken as to be at times barely audible, he makes his mark through quiet persistence and hard work. “Pedro’s not like other Spaniards,” says Javier Elorza, the Spanish ambassador to France who worked closely with Solbes in the past as a senior diplomat in Brussels. “He’s always calm; he’s always cool. He doesn’t attack people , he uses them. He can work with anyone on earth.”

EU officials have closed ranks around Solbes and defended the compromise with Germany, which was reached at a meeting of EU finance ministers in Brussels in February. They point out that a warning would have carried few immediate policy consequences; on the other hand, to avoid one, German Finance Minister Hans Eichel was obliged to make several new commitments.

He agreed to rule out any discretionary spending increases before Germany’s parliamentary elections in September, to stay within the 3 percent deficit limit this year. He also promised to bring Germany’s budget “close to balance” by 2004. Many economists doubt that he can achieve this. Portugal made a similar pledge, and economists are equally skeptical of Lisbon’s ability to bring its budget near to balance.

Yet Wim Duisenberg, president of the European Central Bank and a constant critic of deficit spending, endorsed , crucially , the compromise. The commitments to deficit reduction by Germany and Portugal “go clearly beyond what was otherwise requested,” says Manfred Körber, a spokesman for Duisenberg.

EU officials also point out that the warning incident made the deficit a major issue in the German campaign, which should ensure that whoever is elected in September places a high priority on achieving a balanced budget. Edmund Stoiber, the candidate for chancellor from the opposition Christian Democratic Party,Christian Social Union alliance, had launched his campaign by suggesting that Germany stimulate growth by borrowing up to the 3 percent limit. Postcompromise, he has abandoned that argument and begun to attack Schröder’s Social Democratic government for presiding over a worsening economy and deficit.

“The debate in Germany has never been this intense about fiscal problems,” says Klaus Regling, director general for economic and monetary affairs at the commission, who co-drafted the stability pact with Stark at the German Finance Ministry in the ‘90s. “I would have preferred all this not to happen, but the result was good, so I have no problems with it.”

For Solbes, the incident ended on a characteristically positive note. His resolve earned him plaudits, even in Germany, where the confrontation provoked criticism of Schröder. The Frankfurter Allgemeine Zeitung lambasted the chancellor for “an impudent show of power politics.”

A postal worker’s son from a small town near Alicante on Spain’s Costa Blanca, Solbes earned a Ph.D. in political science from the University of Madrid and studied economics at Brussels Free University before joining Spain’s Trade Ministry as a civil servant in the late 1960s. In the 1980s he helped facilitate Spain’s entry into what was then called the European Community, first as a senior official in the Economics and Trade Ministry, then as secretary of state for EC relations in the Foreign Ministry. In that job Solbes deftly resolved a number of conflicts over Spain’s compliance with a plethora of EU regulations after the country’s entry in 1986.

The membership agreement included a seven-year delay in Brussels’ reduction of a customs duty on Spanish exports to the rest of the EU, from 17 percent to the EU average of 5.5 percent. Naturally, many Spanish industrialists opposed any delay, but Solbes stuck to the agreement, considering the duties a spur to Spanish productivity.

Events proved him right. Companies streamlined, investment in Spain soared, and Spanish exports to the EU surged. The EU subsequently cut the delay to five years. “He was clever enough to know what was important and what wasn’t [in negotiating with the EU],” ambassador Elorza says.

Solbes’ success in smoothing over hundreds of niggling trade issues during Spain’s early years in the EU won him the admiration of his boss, Francisco Fernández Ordoñez, then foreign minister and one of the handful of people around prime minister González who helped bring the Socialists to power. Having such a patron was critical in a country where personal loyalty can loom larger than ideology. Thus Solbes, although a technocrat rather than a politician, was tapped by González to be agriculture minister in 1991. Two years later he was named finance minister even though he was not a Socialist Party member.

At Finance Solbes had a rude initiation. Within weeks of his arrival, Spain was forced to devalue the peseta during an intense bout of European currency speculation. “I suffered personally,” he says, noting that he will go down in history as the last man to preside over a Spanish devaluation. But the experience made him determined to get Spain into the monetary union, to banish exchange rate instability once and for all.

Solbes made deficit reduction his top priority, a wrenching change for a Socialist government that regarded deficit spending as a tool of progress. “We had to change the culture,” he says. Unfortunately, he had little success in controlling spending by Spain’s regional Socialist Party barons, and the deficit remained a massive 6 percent of GDP in 1995. “He didn’t have the power in the party [to control spending],” one official says. When José María Aznar’s Popular Party government took power in 1996, it had to impose austerity measures to qualify Spain for the euro.

Despite his lack of success, Solbes’ reputation as an advocate of budgetary restraint and Spanish participation in the euro remained intact. When the Socialists nominated him for one of Spain’s two seats on the European Commission in 1999, Aznar, who could have vetoed the nomination, didn’t hesitate to second Solbes.

Not surprisingly for someone who entered public service under Franco, rose to ministerial heights under the Socialists and now works comfortably with Aznar’s conservative government, Solbes describes himself as a pragmatist rather than an ideologue. “I didn’t reach my [policy] positions by theoretical analysis but by practical experience,” he says. He talks of solidarity rather than socialism and says that although health care and pensions are universal rights, benefits must be set at affordable levels.

That Solbes should find himself at the center of the recent German controversy is fitting, because he played a major role in forging the stability pact. He was chairman of the EU’s council of finance ministers in 1995 when Theo Waigel, then Germany’s finance minister, demanded that the EU adopt deficit limits. At the time, the idea of the euro was gaining credibility, and Waigel saw the need for binding fiscal rules to allay German concerns about sharing a currency with more-profligate EU countries.

“My first reaction was not very positive,” Solbes acknowledges. He was then focused on winning agreement on a changeover strategy to switch from national currencies to the euro. It covered everything from establishing the European Central Bank to introducing notes and coins to finding a name for the single currency. Waigel’s sudden insistence on new budgetary rules risked a political confrontation that could have derailed the entire project, and Solbes initially sought to quash the demand.

But at an informal meeting of EU finance ministers and central bankers in Valencia, Spain, in September 1995, Solbes was persuaded by the arguments of Waigel and then,Bundesbank president Hans Tietmeyer. If EU countries were going to share a currency, they would need rules to prevent some members from running excessive deficits that could drive up interest rates for everybody. It was also clear that if the EU was to adopt a deficit limit, countries would have to aim for balanced budgets or surpluses in good times so that they could stay within the limits in bad times.

The logic holds just as well now as it did then, Solbes insists. “The rationale has convinced all of us,” he says. “I am satisfied with the existence of the pact. This is one of the crucial elements of monetary union.”

Solbes was instrumental in forging an EU consensus behind the stability pact. Stark, who was present at the Valencia meeting as Waigel’s deputy, recalls Solbes telling his fellow ministers, “We have to agree on rules to bind our successors.”

At the time, no one would have predicted that less than a decade later, a Spaniard would use the pact to lecture a German about fiscal discipline. But it is the ultimate irony that monetary union, a German-designed project that many Europeans feared would perpetuate German economic domination, has thus far benefited formerly wayward countries like Spain rather than Germany. Spain accepted fiscal restraint and enjoyed a boom as its once-high interest rates plunged to the same low levels as those of Germany. Last year the country recorded a budget surplus for the first time since the Franco regime ended in 1975.

Indeed, eight of the 12 countries in the euro zone enjoyed balanced budgets or surpluses in 2001, and even Italy has trimmed its deficit to 1.4 percent of GDP. Germany, however, remains in an economic torpor caused by the costs of reunification, high taxes and excessive regulation. The result is a persistent deficit.

Solbes’ status as a former finance minister and key collaborator on the euro project has certainly enhanced his authority. His unflappable demeanor , a stark contrast to the bluster of his predecessor, France’s Yves-Thibault de Silguy , wins praise from commission colleagues, EU ministers and the ECB. “People like him as a person and respect his competence,” one senior EU official says.

But unlike most finance ministers, Solbes is not a true politician. He never did join the Socialist Party, even while serving as a minister under González. Although his calls for budgetary restraint, pension reform and other difficult measures were laudable, his lack of political clout curbed his effectiveness.

“He’s a very nice person, but you need to be a little bit of a bad person if you want to be in politics,” sums up Miguel Fernández Ordoñez, a former head of Spain’s electricity regulator.

Solbes showed political naïveté in proposing the warnings without being certain he could get them approved by the council of finance ministers. Portugal immediately opposed the action. Eichel, however, initially hinted that Germany might accept a warning, presumably to try to minimize any policy prescriptions.

But when Chancellor Schröder attacked the commission a few days later at the World Economic Forum in New York, it quickly became clear that Solbes wouldn’t have enough support. In the end, only Austria, Belgium, Finland and the Netherlands backed a warning. France and Italy were expected to side with Germany. The U.K. settled the issue three days before the meeting: Gordon Brown, chancellor of the Exchequer, announced that he would back Eichel. That was seen as a payback for Solbes, who angered Brown last year by criticizing his plans to raise British social spending and push the budget into deficit.

“The commission didn’t have any support at all,” says one British official. “They made a mistake. They’ve lost credibility.”

Solbes rejects the charge of naïveté and says he knew perfectly well that the finance ministers were likely to overrule him. But he insists that for the stability pact to remain credible, the commission must follow the rules and not pull its punches in response to political pressure. “Does the commission have to refrain from doing something that legally it has to do because of this kind of risk in the council?” he asks. “My position is clear: no.”

Schröder has posed a more serious criticism: Why did the commission propose a warning when the agency had endorsed the economic policies that produced the deficit in the first place? Germany introduced the first round of a five-year tax cut package last year that is projected to add the equivalent of 1 percent of GDP to the deficit. That was a violation of the spirit of the stability pact, given that the German budget wasn’t yet close to being in balance.

But Solbes and the commission supported the move, in the belief that the tax cuts would indeed lift the country’s growth potential. Income tax rates on average earners, after all, still stood at 50.7 percent in Germany last year, compared with an EU average of 43 percent and a U.S. rate of 30 percent. As one EU official put it, “What’s the use of sending a warning to Germany if everyone’s agreed they’re doing the right thing?”

Solbes defends his support for the tax cuts as an example of flexibility in applying the EU deficit rules. He says he endorsed Berlin’s policy on the condition that the government shift its priority back to deficit reduction when growth picked up. As it happened, the growth dividend never came. Instead, the global slowdown pushed Germany into recession in the second half of last year. Then, Solbes insists, his hands were tied by EU rules: “If you are close to 3 percent, then we as the commission have the obligation to say something.”

For all of his determination to respect the rules, Solbes proved adept at compromise when he realized he lacked support for the warning. While Eichel lobbied fellow ministers over the phone during the week before the February ministerial meeting, Solbes met with ECB president Duisenberg to test his support for a deal. Duisenberg suggested the outlines of the compromise in a February 7 news conference, saying, “If there are ways to extract certain definitive and well-defined commitments from the governments concerned, that might replace the early warning.”

A draft of those commitments was hammered out the following Monday by ministerial deputies at a meeting that Germany and Portugal boycotted. That evening, after six hours of heated debate among the euro group, consisting of finance ministers from the 12 euro-zone countries, Eichel signed on to the package. He was reconciled to his fellow ministers’ not rejecting Solbes’ proposal outright, as Germany wanted.

Still, the outcome of the confrontation casts serious doubt upon the willingness of EU members to actually enforce the stability pact. After all, the pact explicitly calls for a warning if a country’s deficit diverges significantly from its planned level or if it approaches 3 percent. Germany’s deficit last year exceeded the government’s budgeted level by more than 1 percentage point and was less than half a percentage point from the ceiling. If the EU wouldn’t issue a warning under those circumstances, what are the chances that ministers will take action if Germany violates the 3 percent limit?

“Credibility usually involves predictability,” says Christophe Duval-Kieffer, an economist at Credit Suisse First Boston in London. “The compromise is unclear on the consequences of a failure by Germany to comply with its new budgetary commitments. Another compromise, presumably?”

Solbes admits to being frustrated that the early-warning procedures weren’t followed but pronounces himself “quite satisfied” with Eichel’s commitment to balance the budget. Will EU countries enforce his recommendations if Germany falls short again? “I don’t know,” Solbes acknowledges. “But we in the commission have the obligation to work on the basis of the existing legislation.”

“The aim of the warning was achieved,” concurs the Spanish Treasury’s director general, Gloria Hernández, who played a key role in forging the compromise. “Germany and Portugal committed themselves to avoiding a breach of the 3 percent.” She adds that there was “no doubt at all” that ministers would take action were Germany or any other euro-zone country to break the 3 percent rule.

Belgian Finance Minister Didier Reynders, who campaigned with little success for closer budgetary cooperation when he chaired the euro group last year, says he regrets that Germany trampled over the early-warning procedures but welcomes the substance of the compromise.

“There was a very clear message to Germany,” he says. “The peer pressure in the euro group is rather effective.” Nevertheless, Reynders acknowledges that the need to get a qualified majority vote within the council of finance ministers to enforce the stability pact is a potentially crippling defect. “If the budget situation doesn’t improve in Germany, it will be impossible to repeat the operation. We will have to have a vote, and that is when the credibility of the pact will come into play,” he says.

But it remains doubtful whether Germany can live up to its end of the compromise and bring its budget close to balance by 2004. Since the February meeting Germany has issued revised figures showing that growth was slightly lower last year, at 0.6 percent, and the deficit slightly higher, at 2.7 percent of GDP. With growth expected to be very sluggish at 0.7 percent this year and to recover to no more than 2.5 percent in 2003 and 2004, Germany would need to take serious belt-tightening measures of the kind it has ducked for years to bring its budget anywhere near balance. And yet Germany has already programmed a second round of tax cuts for 2003, worth E18 billion ($15.9 billion), the equivalent of just under 1 percent of GDP.

“The target for 2004 has no credibility at all,” says Eric Chaney, an economist at Morgan Stanley. “Keeping this target undermines the credibility of the commission and EU governments.”

Solbes believes that the target can be reached, although he concedes that Germany will most likely need to make significant spending cuts in 2003 or 2004 to do so.

Eichel started to address the problem late last month by negotiating a national stability pact with the German Länder, or state governments, whose red ink is mainly responsible for the country’s deficit woes. The federal deficit, which Eichel controls, remained effectively unchanged last year at E26.9 billion. But the combined deficits of the 16 Länder ballooned to E25.6 billion from E7.9 billion. Add some red ink spilled by local governments and the social security system, which also count under EU rules, and Germany’s total deficit hit E56.3 billion last year. In 2000 Germany posted a surplus of E23.9 billion, but that was only because of a one-time windfall of E50 billion from the auctioning of mobile telephone rights.

The recent agreement requires Eichel to reduce federal spending by 0.5 percent a year in 2003 and 2004, compared with previous plans for increases of 0.6 percent and 1 percent, respectively. The states pledged to limit spending increases to 1 percent in each of those years, down from the planned 2 percent.

Solbes welcomes the agreement as potentially significant but says, “We have to follow what happens in reality.” Many outside analysts remain skeptical that the German pact will meet Eichel’s tough budget goals. “There is no way the federal government can arm-twist regional governments,” says Moritz Kraemer, an analyst in the sovereign ratings group at Standard & Poor’s in London. “The fiscal situation in Germany is at a point where it is hard to see, without an economic recovery, how a catch-up with its European peers could occur.”

Eichel, who officials say was willing to accept a warning before Schröder turned it into a high-profile issue, appears determined to bury the dispute. Both he and his deputy decline requests for an interview. “We don’t want to clash now with the commission,” says Thomas Gerhardt, a Finance Ministry spokesman. “The commission has done their duty. Everything is working very well now.’”

Germany’s difficulties revive questions about the economic merits of the stability pact, which have persisted ever since it was proposed. Most economists agree that some form of budgetary discipline and coordination is needed in the euro zone, but many regard the pact as a crude and potentially counterproductive tool. For one thing, the 3 percent ceiling is arbitrary; it simply corresponds to the average deficit level in the early 1990s, when the Maastricht Treaty was signed. The pact also restricts the ability of governments to quickly respond to economic downturns like the one that hit the euro zone last year, while failing to guarantee long-term fiscal discipline, as Germany’s case shows.

“During every serious economic slackening, these kind of thresholds will be breached,” says Gustav Horn, an economist at DIW, a research institute in Berlin. “I don’t think a country that has serious economic problems can be punished by other countries.” Horn believes that Germany would be crazy to try to balance its budget by 2004: “Eichel has to save a lot of money in a short period of time. It will hurt the recovery.”

At the February EU meeting, Britain’s Brown mounted a strong attack against the stability pact, which U.K. officials regard as an obstacle to British membership in the euro zone. He argued that the EU should take greater account of the economic cycle and the debt levels of individual countries when assessing deficits. Brown was angered last year when the commission cautioned him about planning major increases in spending on health care and other public services. With a national debt of 39 percent of GDP, the third lowest in the EU, the U.K. can easily afford to spend more, Brown asserts.

“We believe there needs to be coordination between fiscal and monetary policy,” one British official says. “But we don’t think the way the pact is being interpreted at the moment is economically very sensible.”

Solbes has already responded to some of these criticisms. He won approval from finance ministers last year to consider countries’ cyclically adjusted deficits , not just nominal deficits , in assessing compliance with the pact. Because of that shift, the commission advised EU countries to tolerate a rise in welfare spending and a drop in tax receipts last year rather than impose austerity measures in the midst of the economic slowdown.

First, however, countries need to get their budgets in order. Countries like Finland, which posted a budget surplus of 4.8 percent of GDP last year, have a lot more leeway to tolerate budget slippage than Germany. “What is rather clear is that even if the economic conditions are not good, you cannot trespass the 3 percent,” says Solbes.

Solbes will have plenty to think about this year. This spring he plans to introduce fresh proposals for strengthening cooperation on budgets and economic policy in the euro zone. But officials acknowledge that any attempts to set formal rules are just as likely to be rejected by ministers as they were last year. And there is always the possibility of another test of the stability pact as long as Germany remains so close to the deficit limit.

Solbes is reluctant to criticize ministers and fully aware of his own limited enforcement powers. But don’t expect him to step aside if anyone tries to rip up the pact. “You can’t ask the referee, which is the commission, to change the rules of the game,” he says.

Gerhard Schröder, the Brussels basher

In February Germany squared off against the European Commission over Brussels’ criticism of Berlin’s budget deficit. It was a striking show of rebellion, given the country’s reputation for fiscal rectitude. But the incident was far from unique.

In recent months Berlin has clashed with Brussels over a number of issues, and last month Chancellor Gerhard Schröder demanded a meeting between his government and a team of Eurocrats led by commission president Romano Prodi.

Schröder came to power in 1998 promising to jettison Germany’s remaining postwar inhibitions and to stand up for national interests, and he surprised no one by immediately demanding a reduction in his country’s massive contributions to the EU budget. But with another German election looming this fall, his EU attacks have taken on a ferocity that is worrying officials in Brussels. After all, Germany’s traditional support for closer EU integration had made it the commission’s staunchest and most powerful ally. The warm relationship between former chancellor Helmut Köhl and former commission president Jacques Delors in the late ‘80s and early ‘90s helped keep the EU on track for monetary union.

Schröder’s chief grievances: A commission proposal would place tighter environmental constraints on the EU chemicals industry, which the chancellor regards as a threat to Germany’s powerful chemicals sector; a commission directive requires automakers to loosen controls over their dealer networks, a move strongly opposed by German car makers DaimlerChrysler and BMW; the commission has bid to revive a pan-EU takeover directive, which Germany vetoed last year to protect its companies from the threat of foreign predators; and the commission has attempted to tighten enforcement of existing competition rules by cracking down on Berlin’s subsidies to industries in the former East Germany. The commission’s proposal to warn Germany for letting its deficit creep close to the ceiling of 3 percent of GDP was simply the last straw.

Sources say that Schröder regards commission actions as evidence that it is biased against the manufacturing industries that dominate the German economy. He is determined to stand up for manufacturers as vigorously as the U.K. defends the City and France its farmers.

“The German position has shifted since unification,” one senior commission official says. “They absorbed 17 million people , a poor country , into their own. That has required a lot of state investment, which has altered their views about the role of the state in the economy.”

Schröder met with Prodi on the eve of the EU summit last month and demanded the meeting with the commission , a highly unusual step. Chancellery officials say they expect Prodi and several colleagues, including internal market commissioner Fritz Bolkestein and competition commissioner Mario Monti, to come to Berlin this month or next.

The hope in Brussels is that Schröder is just talking tough before the national election in September and not signaling a serious shift to Euroskepticism. Klaus Becher, a German analyst at the International Institute for Strategic Studies in London, endorses this view. “It seems to be more and more common that one tries to raise one’s profile by standing up to the bogeymen in Brussels,” he says.

But the scope and intensity of Schröder’s complaints suggest that Germany’s economic woes are causing Berlin to waver on its EU commitments. “He would like to give aid right and left and be seen as the guy who manages industry,’' says Daniel Gros, director of the Center for European Policy Studies in Brussels. “You can’t do that.”

Maybe not under EU laws, but if Schröder persists in his truculence, those laws will be hard for the commission to enforce. , T.B.