Merkel rejects talk of new debt writedown for Greece, insists country is making good progress

German Chancellor Angela Merkel met last week with journalists from Sueddeutsche Zeitung, Kathimerini, Le Monde, El Pais, La Stampa and the Guardian, ahead of a July 3 meeting of European Union leaders in Berlin to address the issue of burgeoning youth unemployment in the 27-nation bloc.

The subject of Greece has been on Merkel daily agenda since 2009, when the country’s deficit was announced. Up until then, the only Greek issue that had really concerned her was that of a German submarine purchased by the Greek government that was found to be faulty – “the crooked submarine” as she likes to jest. But since that day in 2009 when the Greece file became a permanent fixture on her desk, she has been reading the Greek press every day.

When she met with Kathimerini and journalists from another five leading European newspapers at the Chancellery for an hour last week, she had trouble pronouncing the name of the Greek newspaper, but had a very clear idea of the situation in Greece and knew much of the day-to-day minutia of the crisis, such as the lack of liquidity and the government’s efforts to attract foreign investment.

Last week, Greek Development Minister Costis Hatzidakis and German Finance Minister Wolfgang Schaeuble agreed on the creation of a Greek investment fund that would help in the absorption of funds coming into the country for the purpose of creating jobs. According to a source close to the fund talks, the Germans had been wanting to create such a body for some time but were waiting to see greater commitment from Greece.

Merkel appeared well aware of the severity of the liquidity problem and admitted that it had been underestimated by both Berlin and Brussels.

The chancellor also said she didn’t see Greece needing a new debt writedown, although she declined to comment on what would happen if the International Monetary Fund were to demand a haircut on state-owned Greek debt as a condition for its continued backing of the Greek rescue program.

There are 90 days before the federal elections in Germany and you seem to have only just discovered the problem of youth unemployment in Europe. Why now?

Unemployment among the young people of Europe has been a concern of mine for a very long time. I have held meetings over the past year with unionists and employers on this issue and when at the start of this year we agreed at the Council of Europe on the fiscal framework for the next few years, we achieved funding of 6 billion euros exclusively for the fight against youth unemployment. Furthermore, [French President Francois] Hollande and I spoke with representatives of European businesses regarding their possible contribution to this end. If the European Parliament ratifies the European Union budget, we will finally have the additional funding for this cause.

The money is already there, but the problems in the labor market have much deeper roots.

Right. Money alone won’t be enough. We will need intelligent reform. It is not smart, for example, when some European countries amend labor laws only for young people and not for older people who have already worked for many years. This exacerbates youth unemployment at such difficult times. We also need more labor mobility in Europe. The [German] federal labor minister, Ursula von der Leyen, has made efforts to significantly boost EURES, the network of cooperation between the European Commission and state employment agencies. This European job-seeking service helps many looking for training or employment opportunities in another country.

Are you afraid of the political protesting power of the lost generation?

In an aging continent, such a situation is unsustainable. We must not allow there to be a lost generation.

Does Germany have its own model for tackling youth joblessness?

Even though we have reduced unemployment among young people by half since 2005, we still have a problem when, for example, our high school graduates are not trainable. We have to do something about them and the best way still is the dual system, which means a mix of school education with hands-on training within a business. We are now in the position to offer a place on a training program to every young person who wants one. One thing that experience has taught us is that there is of course no need for any country to introduce the whole dual system straight away. Vocational training outside a company can be an alternative. The second thing we have learned is that we should not always try to make our young people more academic.

The job market in Southern Europe is practically incomparable to Germany? Can solutions from one country be imported to another?

Youth unemployment cannot be dealt with in one way anywhere. After the reunification of Germany I had been hoping that some big investor would come to my district and solve the problem of 25 percent unemployment. That investor never appeared of course and I realized that the foundations had to be built one step at a time – 10 jobs here, six there, five there.

Have you ever felt the fear of unemployment?

Fortunately no. In the early years of my political career I would sometimes imagine what I would do if I suddenly left politics. Running a job center was one of the ideas I had. It’s a pleasant task to help people find work.

Do you feel like you are becoming something of a labor director for Europe?

No. My duty lies elsewhere: putting Germany and, together with my colleagues, putting Europe, on the right political course.

Say a Greek businessman slashes his labor costs by 20 percent, but his loan is two-and-a-half times more expensive than it would be in Germany, how can he become competitive and hire people?

It is true that the high cost of refinancing business loans proved to be much more painful than we had expected in Europe. The European Investment Bank and the German Development Bank (KfW) can help for a certain period of time, and Finance Minister Wolfgang Schaeuble is currently in talks with Spain and Portugal, and will soon also be with Greece, about how this can happen. I also support the plans of Greek Prime Minister Antonis Samaras to establish a Greek investment bank that will work with KfW. In order to find a lasting solution to the problem we need better regulations in the banking sector and reliable central bank oversight. This would reinstate investor confidence and lead to lower interest rates in the long term.

Should the creation of an EU banking union be accelerated?

We are making progress on extensive banking supervision, but speed without the thoroughness would not help us. Supervision will begin next year. First, the European Central Bank has to hire hundreds of experts who will be able to safeguard its reputation as a supervisor. We are working toward harmonizing the national systems of depositor guarantees, while the protection of savings in Germany will continue without any changes. Finance ministers have agreed on a European directive on banking resolution.

Germany is promoting programs for boosting the labor market and becoming more flexible on deficit limits. Does this mean that the age of austerity is over?

As far as I’m concerned, there is no contradiction between having healthy public finances and growth. How did the debt crisis emerge? Some countries became so overindebted that investors lost confidence in them and would not buy their bonds. Interest rates skyrocketed, and countries could only borrow money at exorbitant interest rates. In such a situation, taking on more debt cannot be the solution. No, deficits need to be reduced so that international investors can regain confidence and there is scope for investment in the future. Europe has made significant progress in this respect.

But investors are not just interested in the size of debt.

Right, because how competitive a country is, how much industry it has and how effective its administration is are equally important. Where you need to be careful is making sure that there is not a big gap between the growth of salaries and productivity. We became painfully aware of this in Europe through the shock of the crisis. Now everyone knows that this could not continue. This why the path that is currently being followed is the right one: fiscal consolidation on the one hand and fundamental structural reforms on the other. Lasting growth can emerge from this combination. The next step is for every country to ask itself what it can make money on, what industries and services it wants. The construction sector alone, for example, is not enough to prop up an economy, as we found out in Germany when the construction boom died down after reunification.

There appears to be a change in your overall tone. You seem to be talking more about programs and investment than austerity.

But the two are intrinsically linked. I’ve always said that we have to proceed one step at a time. Some things have been achieved: The deficits in Europe have been reduced by about half. Now we need to not lose our patience.

The eurozone and Europe

The eurozone is the only region in the world that is still in recession. What is it doing wrong?

When countries that are hit by crisis see their overinflated public services and construction sectors shrink, it is obvious that they will not experience growth in the first few years. But if you look at the Baltic states, which after several tough years of cost-cutting and reforms are back in a much better place and are showing signs of growth, then the lesson is that countries which implement reforms that boost competitiveness will achieve growth in the medium term. I believe that people in most countries know what went wrong in the past. I am saddened though by the fact that those who have no responsibility for the way things turned out, like young people and the poor, often suffer more than the other. In many cases, people with capital have fled the country or have other ways of protecting themselves. The rich in the countries that are hardest hit by the crisis could achieve a lot if they tried more. The fact that the financial elites are taking on so little responsibility for the situation is truly sad.

The citizens of Southern Europe are concerned about Germany’s influence on issues that affect their day-to-day lives. Does everyone have to recover the German way?

It is very good if a country wants to structure its economy in a completely different way to Germany’s. I’m always pleased to see different roads leading to success. But what nobody can deny is the need to be competitive and to work for and earn prosperity. When I look at Italy, Spain or Greece I do see very different, successful industries.

But no large sectors.

Size does not determine success. What is crucial is that we all realize how much the world has changed. China, India, Brazil, South Korea and many other countries have been [Europe’s] competitors for quite some time in areas we used to dominate. We must react to this and change. The World Trade Organization tell us that the overwhelming majority of growth in the world is taking place outside our continent. We either offer those parts of the world attractive and innovative products, or we resign ourselves to losing market shares and therefore prosperity, which is precisely what I do not want, either for Germany or for Europe.

Why did you want the IMF to participate in the fight against the debt crisis? Couldn’t Europe manage on its own?

The International Monetary Fund has more experience with indebted countries than anyone else in the world. Its reputation and its expertise made it much easier for us Europeans when we were negotiating the bailout programs with the indebted countries.

The IMF has been voicing mounting concern about the sustainability of the Greek debt. Internal regulations could even force it to depart from the program. Would this extreme-case scenario mean that Europe would have to support the Greek program without the IMF?

Greece has made progress thanks to the very reform-oriented government of [Prime Minister Antonis] Samaras. I expect that debt sustainability will continue to be a given.

Does this mean that you rule of a writedown?

I don’t see it happening.

Following developments in the last few weeks, how do you see Turkey’s position vis-a-vis Europe?

Turkey is a very important and close partner of Europe. We are in accession negotiations with Turkey; the outcome is yet to be determined. After the events of the past few weeks, Europe has not just gone back to business as usual because human rights are non-negotiable. The compromise that we have reached is that we will proceed to the next chapter of accession negotiations in October, following a progress report from the European Commission.